Disclaimer

This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Monday, March 17, 2008

Credit just got tighter - FICO 2008

Posted by Matt

If you enjoyed my latest post about credit scores, you'll probably also be interested in what I learned about upcoming changes to the Fair Isaac scoring algorithm. The algorithm is proprietary and exact details about the changes aren't available, but here's what I was able to learn in general:

  • Updated FICO scores should start appearing within a few months
  • The score range is the same (300 to 850)
  • The same input criteria are used (indebtedness, payment history, number of recently opened credit accounts, type of credit used). See Credit Mantra's nice pie chart.
  • The model will more accurately identify risky credit behavior and is projected to reduce credit default rates by between 5 and 15 percent.

Another interesting fact that I learned (and that many people may not realize) is that income is NOT a factor in determining the score. In other words, borrowers are judged on their willingness to repay (as determined by their past behaviors) and not their ability. I can validate this with our recent experience in trying to rent out our last house; we've encountered several applicants who were scored as untrustworthy, despite having very large incomes. It was surprising and a bit depressing.

Bottom line: An improved scoring model is great for everyone. Borrowers will have less opportunity to get themselves into trouble, and scores for people with good credit behavior are expected to go up! Good news for Frugalizers!

1 comment:

ThePowerStocks.com Team said...

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Here's our market view on American stock market for 13th October, 2008

You all know my opinion - we have the characteristics of at least "a" bottom. Look at the scoreboard - Dow and S&P 500 down 18% last week, in only a week. If that doesn't show irrational dumping the only other environment that probably would is an official end of the world pronouncement from on high.

The VIX Index (69.96) soared to a record high; bears at extreme high levels, bulls no where to be found; valuation levels the best since Black Monday, October 19, 1987. And back then you could buy AAA long term munis yielding 10% or better vs. around 4.75% today.

No one can call bottom in advance with confidence, but we can correctly report that the conditions for at least a bounce are in place, assuming we are not headed for a 1929 depression.

We are not, but don't take my word on this. Last Tuesday, Oct. 7, Gary Becker the 1992 Nobel economic laureate, professor of economics at the University of Chicago stated in the Wall Street Journal - "we're not headed for a depression."

He states, "World economic growth will recover once we are over the present severe difficulty." Also he states, "Although it is the most severe financial crisis since the Great Depression of the 1930's it is a far smaller crisis, especially in terms of the effects on output and employment."

ThePowerStocks.com Team
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