Banks Re-Defining "Deadbeat"

That is the big misconcept that most folks have on credit scores. The credit score is not a rating of how good of a money manager you are, how financially savvy your are, or how wealthy you are. Rather, the score shows how profitable you are as a credit user, and what rates they have to offer to entice you into taking on more credit.

If a person is wealthy and has no credit accounts, they will either have no record, or a very low credit score. That is the optimal place to be from a financial position. So, lets all strive for a low FICO.

The problem is that some vendors are starting to use FICO scores in places unrelated to credit. For example, insurance companies are using it as a ratings tool, and some job applicants are being screened on credit score. This means that individuals who are the best money managers the most savvy (or the most lucky) end up in the deadbeat basket in these cases along with the bankrupt and money drunks.

-john-

I recall a thread here some time back that there were factors that created the score. From the PBS show Frontline's "Secret History of the Credit Card" we have;

35% payment history 30% amounts owed 15% length of credit history 10% new credit 10% types of credit used

And from myfico.com, the implication that FICO directly impacts loan rates, on a 15 yr equity loan;

760 APR= 5.83% 700 = 6.05%

etc.

Yes, income doesn't come into the equation, per se, but scores impact one's ability to borrow. To some degree the score is a measure of responsibility. JOE

People's "misinterpretation" of a high credit score and how it's achieved, is unfair but a fact of life now. Yet another set of somebody else's rules to follow but not playing along could cost you more. Saving and retirement planning makes you look bad is what the FICO score is saying, but most of us long-term thinkers know the real truth.

Elle, I just bought a car, and wound up paying $1000 below "dealer cost". However much the dealer made, it was certainly $5000 less than the poor soul who walks in an pays MSRP. When I walked out, I have no doubt the salesman had no kind words for me, even though I walked in saying "I've decided what car I want, and I'm not leaving till I sign the paperwork." I bought American. A Toyota made in a US factory. Not a foreign car, a Ford made in Canada, but I digress.

It doesn't surprise me that the credit card industry would speak that way. I've seen that the numbers they charge the merchant are in the

1.8-2.25% range. With all the rebates to the consumer, cash-back, miles, etc, how much money can they make on me when I pay in full, and they give me 2% cash back, regardless of total spending? I've seen that expression for the 'pay-in-full' customers, and have been proud to be part of the deadbeat club for some time now.

I'm not sure how that all relates back to FICO, however, last I checked, my FICO was just near my Math SAT score, and the CC offers were still coming in.

JOE

"joetaxpayer" wrote

Is "dealer cost" the same as "invoice" or not?

I agree it's a pity more people do not come here asking about how to finance, and so negotiate, their car purchases. 'course John Weeks is always ordering people to buy used, old, and reliable, so that helps the archives.

IF I buy new next time around, I plan to solicit price offerings and competition by email. I am seeing a lot of reports at the Honda newsgroups about how well this works.

Only a man walking into a dealership could get away with this /and/ get a good price.

Down, boys. ;-)

Like you, I have tried to nail down whether dealerships loathe those who pay cash. It seems unclear. Maybe because car salespeople are judged mostly based on the bottom line price of the car, and how it's paid for matters little to them. 'Course the financing people in the back room will mind.

Braggart (I mean about the FICO score). ;-)

There's MSRP, the manufacturer's suggested price. Then there's the "Dealer invoice" (I mistyped above). That price still has a profit for the dealer, of course, and is called "holdback". A website offers guidance as to the holdback by manufacturer.

Truth be told, my wife, having the MSRP and Invoice numbers for the car I wanted, started calling around. The fourth dealer had the best price and I had that in my pocket, along with a different last name. The floor salesman wouldn't even go that low. So my wife goes back to the lobby and calls the phone hotline guy down to close the sale. That's how I could seem so sure of myself, that price was lower than I'd have expected to pay in the first place. So she gets the credit. With all the information available on the web, if you are in an area with more than 2 or 3 dealers for the car you want, it's worth the effort to save that kind of money. [The manager still tried to sell me financing, which I declined. I'd planned this purchase for some time now, and at 44, figured I deserved a new car.] JOE

"joetaxpayer" wrote

Well silly me. A guy as smart as you would have a wife fully participating in the partnership. :-)

Bachelor gentlemen, take note. Seriously: After the Car Talk guys, MIFP is the next place to stop for marital advice. It's not personal. It's business.

Whoa. Real firebrand you married. You go!

AFAIC, a new car pays off about as well as a used one, since one knows its history perfectly. Two of my three vehicles were purchased new. It's only recently that I am thinking of going used, and only because I am very handy with cars, and it's a pastime at this point, and I'd rather give more money to charity yada.

That's essentially what I did when I bought a new Honda Accord three months ago. You can go to honda.com, and there's a link to forward your request for a price quotation to as many Honda dealers in your area as you want. Also, you can forward the email price quote from a relatively distant dealer to a more local one and ask him to match it. It sure beats having to go haggle in person.

"John Richards" wrote

Good tip (and anecdote), especially for those of us in relatively small towns with only a couple of dealers in the cars we desire.

It's been known in the automobile industry the women influence the majority of car purchases, as high as 70% I've read in the papers. Women in negotiations with cars are actually more confrontational with the salesman and get the salesman to back down sooner. They also influence how successful a new design is and women push the safety factor of SUV's onto the industry, event though SUV's are not all that safe unless you are properly trained to drive them.

I think too that women might influence the majority of new home sales but that's a hunch that I've gotten from my industry. It would be interesting to find out.

======================================= MODERATOR'S COMMENT: Posters to this thread should relate comments to financial planning.

A year back, we talked about FICO scoring and how different things can impact it. I recently applied to have my HELOC rate drop (and credit line increased). The approval came back within a few days, along with FICO scores for the Mrs. Taxpayer and me. She is at 817 to my 766. We've had the same accounts for our entire marriage except for a few store cards she pays in full, and the 0% teaser card (in my name only) where I took the $20K and put it in a 6 month 5% CD. Now, from the above percentages, I take it that my stunt impacted amount owed (of course), pulled down my average credit history (?), and added new credit. So in the end I attribute 40-50 points hit due that one move. Since FICO doesn't see positive assets such as our investment accounts or CDs, they can't distinguish between what I did vs someone spending the money on a trip, or any other purchase. The report specifically says "too many inquiries" and "too many accounts recently opened". Doesn't take much to trip those alerts I think.

I know some people go over the edge obsessing over their numbers. I don't plan to go there, but if I did, I'm sure there are some simple ways to gain back those 50 points.

JOE

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I used to work at a car dealership and saw a lot of credit reports and scores over the years. The wife almost always had a better score, even when the principles had both names on everything. The only time her score was lower, it seemed, is if her credit was trashed before they got married.

I think the sex of the individual has something to do with the score.

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"Daniel T." wrote

By federal law, lenders may not use race, gender, nationality, or marital status (more) in determining credit score yada. Hence FICO does not consider these. Google {"Equal Credit Opportunity Act"} for details.

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AFAIK,the formula used to determine the score is secret. E.i., not subject to public or government scrutiny, so I don't see how that is relevant.

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"Daniel T." wrote Regarding the illegality of using race, gender, etc. in FICO scores and when the typical bank determines loan eligibility:

The FICO formula is subject to government scrutiny. No company operating in the U.S. can legally avoid this law. Considering the many cases concerning race discrimination and lending practices, it should be obvious that FICO would not risk its reputation through supporting illegal lending practices.

If you want to argue that there are cultural factors that result in women being better risks (once all the data is plugged into the FICO formula), then I think it is possible that these factors are identifiable, but in a non-discriminatory way, and end up transmitting through the FICO formula.

Unless you wish to argue that it is discrimination against men to count, as a part of the FICO score, paying bills on time and having large credit card balances.

Women still pay lower auto insurance rates, and it's because they have fewer auto accidents, which could even be said to be an indication of the risk-aversion of women.

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It's not allowed to use bias in lending. If the FICO scores could contain such bias, then lenders couldn't use them.

When you go to the FICO site, you'll find a handy pamphlet:

Under the heading "What FICO scores ignore", the first item is:

"Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act."

Brian

I did not know that. So they do disclose the formula? Where might I see it?

I'm not arguing anything. There may be cultural factors that result in women having higher scores. I wouldn't know though because I don't know what is entailed in determining those scores.

All I have stated to date is that in my experience wives (not women in general) have higher scores than their husbands, and after years in car sales, I saw a lot of credit scores.

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FICO states the score is based on:

35% payment history 30% amounts owed 15% length of credit history 10% new credit 10% types of credit used

You stated "I think the sex of the individual has something to do with the score." And I think you and Elle are both right. I think they tend toward more prudent behavior and as Elle said, risk-aversion. This leads to the correlation of higher scores. Gender wasn't a variable in FICO's scoring, nor is income, for that matter, but I'd presume the wealthy tend toward better FICOs than do the poor. JOE

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