The technique is called "manual underwriting". There is at least on regional chain in the midwest that uses that in their advertising. Many lenders have it as an option, but it is more work, so they want to cherry pick and go with FICO score.
-john-
The above is the heart of the issue AFAICT. The question in my mind is this, if you use *credit* but never have a *loan* (i.e. you always pay off your credit cards before the grace period ends,) does it help or hinder your FICO (or neither)?
It seems to me that timely payments on loans increase your FICO while credit use (paying off the cards before interest accrues) does not. As such, a good FICO cost considerably more than the eight dollars the OP mentioned. Am I right? I can't say because there isn't enough information for me to work with. There doesn't seem to be enough information for *anybody* to figure out the right answer.
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Not too many months ago from the archives, Elle posted an informative link,
Since the FICO score is derived exclusively from the credit report(s), it stands to reason that if you are going to spend time or money reviewing anything, it should be the source of the data, namely the (free annual) credit report, and not the (for-a-fee) FICO score. If you are actively trying to change your score, the only way you'll know how you're doing is to obtain it periodically.
As a lender, I'd want to know why he suddenly wanted to take out a loan
-- what does he know about the future of his income and his assets that I don't? ;-)
No, the $100K in the bank could have appeared yesterday, or be gone tomorrow -- for example, it could just be the proceeds of another loan!
I agree the FICO is designed primarily for the benefit of the lender. Your (John's) comment is focused on the items in Fair Isaac's product line that they call "precision marketing", the FICO is a risk assessment tool. But at least you can get your hands on it, even if at a cost (the folks who work at Fair Isaac are not volunteers). Better than having it be a secret, which, I recall, it was in the early days.
As joetaxpayer has noted in the past, some people think of the FICO score in much the same way as they think the SAT/LSAT/GMAT academic score, whether a good thing or not. I see some parallels, including a parallel to John's observation -- the higher your academic score, the more likely a high-priced Ivy League school can reel you in, instead of a more reasonably priced local or state school.
-Mark Bole
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This doesn't make sense to me. Why would borrowing money regularly (don't hair-split the term) and paying it off regularly be bad for your score?
It shows the ability, willingness, and discipline to handle credit. It also shows an aversion to usurious interest rates, but Fair Isaac doesn't care about that.
I haven't had a loan in over ten years, always pay my credit cards in full each month, and have a top drawer FICO score. -- Doug
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Really? I'm not so sure. I expect that Fair Isaac cares about what their customers care about. Their customers are not you and me, rather they are lending institutions. I expect that lending institutions do care about consumers willingness to pay "usurious interest rates", or at least that makes sense to me.
Well, the FICO score depends on other things besides punctuality of payment, for example your ratio of outstanding revolving debt to total possible revolving debt. I expect you are in good standing there.
So the question to ask is, would your score go up or down (or remain unchanged) if you took out a loan (non-revolving debt) and made "timely payments"? Myfico.com claims that doing so would raise your FICO "in the long run."
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$8 only.You guys make this decision is worth $800.
~Marty~
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The thread "How much is a credit score (FICO) worth" has presented a lot of good information. But since this is a financial planning newsgroup, I thought I'd inject an opinion/comment.
An overriding objective of good personal finance is to live within one's means. By that I mean that there are no unpaid balances at the end of a month - everything is current.
I mention this just in case someone thinks that because of our emphasis on FICO scores, it is acceptable to have debt. For the record, we can make exceptions for younger folks who haven't had time to pay off their home mortgage. Beyond that, no.
I realize that some folks will say that their investments are earning more than their debt and they don't want to pay off their indebtedness. To them I respond if they cannot BOTH invest and be debt free, then they are not living within their means.
That's admittedly tough. But then that's why there are so few multi-millionaires.
-HW "Skip" Weldon Columbia, SC
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Here's an interesting explanation about debt and the money supply (warning, it's 47 minutes long.) I already knew everything (history lesson) in the first half, but the analysis in the second half is scary, even if you don't believe the final conclusions the author makes.
Best regards, Bob
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I think this an artificial definition and not applicable to all situations. I have a 4.875% home loan that is still bumping me up over the standard deduction. I am also investing $30K of salary per year. To say I'm not living within my means just doesn't make any sense.
I could pay off the balance of the loan, and might do so once the principal portion of the payment gets too large. However, this is not the house I plan to retire to. It's the house that fits my needs for now. Whether it's paid off or carries a mortgage doesn't affect my long-term plans very much.
Brian
I don't think so, and it hasn't been that way for my own little bit of anecdotal experience. I've always paid off credit cards without carrying a balance, and I've had a good FICO from the first time I found out what it was.
In the FICO scoring description, it doesn't describe anything about what you say. If does mention debt to credit ratio, so the lower your balances and higher (and more numerous) your limits, the better.
Brian
Sure. One side effect of prompt payment (regardless of whether you carry a balance) is that they keep raising your credit limit. By the way, there are only two credit cards involved here. You don't need lots of cards to get a good score, either.
It might, but who cares? I used myself as a counter example to the original assertion that someone needs to pay $5-$10K in interest to get a top notch FICO score. They don't.
-- Doug
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Not true. FICO scores look at the informaion in your credit report. Take a look at your credit report and you'll see that credit card accounts have listed both credit limits and balance outstanding. Even if you pay off our credit card in full each month (thus, never paying any interest), you still have a balance during the course of the month. You also have a payment history listing months the account was paid on time (not "in full").
*Timely* payment is very important. Ratio of outstanding balances to available credit is important. And all counts.You can get a great FICO score while never paying any interest. Having a credit card that you use moderately and pay off fully every month is exactly how to do that.
One of the credit agencies said it would give me a one-time free FICO score if I signed up for periodic email?
Is less spam worth $8?
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You seem to refuse to differentiate between good debt and bad debt and imply that *all* debt is bad. It's not.
The main consideration which distinguishes between good and bad debt is the matter of what the proceeds were used for. If the debt was incurred in the course of increasing one's wealth - or potential future wealth - it's likely to be good debt. If it was incurred in the course of consumption and the purchase of quickly depreciating assets (ie. televisions), it's likely to be bad debt.
But you're certainly partially right. Some debt is bad, and most *consumer* debt (ie. credit cards with oustanding balances) is bad. And if someone can't tell the difference between good and bad debt, he probably should try to avoid all debt. Just as someone who can't distinguish between good and bad mushrooms should probably only buy them at the supermarket instead of picking them in the woods.
That's way to simplistic. Once you have a credit card, you can usually keep it forever or at least several years without using it. Your debt to credit ration is good but you may not have a job or a penny to your name. A high FICO is obtained primarily by using your credit to make timely payments over a period of time.
Take for instance college students. There are several banks that routinely set up tables in the student union signing up students for their credit cards. They give them to almost anyone without any credit history whatsoever and no job. They have great debt to credit ratio when they start yet no FICO score. They have to demonstrate that they can handle that credit. Paying off a balance every month does not help. It's virtually a wash. In case you missed it, last week i related a story where I was present with a co-worker who applied for a cell phone and was denied without putting down a substantial down payment. This guy had a great income with a long job history. I know because I worked with him for 30 years. His house was paid of 15 years earlier, he always paid his credit card off every month and even had a business that had a cash flow of several hundred thousand dollars. The problem is he had no recent track record of making payments over time. This is a true story. Thumper
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You are entirely correct. Would Trump be where he is without incurring debt to finance his real estate holdings? Would many businesses have succeeded if they waited to receive the money they needed to buy new facilities or even their raw materials? It's how the debt is managed that counts. Thumper
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I nowhere stated that debt to credit was the only FICO consideration.
Fair enough. However, that doesn't match the OP's statement, where paying off on time each month would not count. I agree that frequent use with timely payments will improve your score. You don't need to be paying interest.
Brian
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I think that since FICO has come up, it is wise to point out that a higher FICO is not necessarily a sign of fiscal responsibility.
For example:
Five years ago, Bert and Ernie were in the same situation financially then Bert took out a loan and bought a $30K automobile, while Ernie unloaded some of his low performing investments to by his $30K automobile. As a consequence, today Ernie has a higher net worth than Bert and I expect that most, if not all, would agree that Ernie was the more responsible of the two, yet according to myfico.com &al, Bert ends up with a higher FICO.
Example 2:
Carrie and Dolly are in nearly the same situation financially, they both have 4 credit cards with interest rates of 10%, 15%, 18% and 20% and a $10K limit on each card, also they both have $8K in debt. However, Carrie has all of her debt on the card with 10% interest, while Dolly has her debt distributed, $2K per card. Again, Carrie is in the superior situation, she pays much less in interest every month. However, Dolly gets the higher FICO.
Comments? Does my assessment seem accurate.
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snip
As I posted, FICO takes data points and little more. In your Bert and Ernie example, (Are those the Muppets or the policeman and cabbie from "it's a Wonderful Life?" Just curious.) Fico sees the loan, but the not the car purchased with cash. Think about one thing - if one keeps opening new accounts, over time it's possible to be in over their head, yet keep the ratios right in line to fall into the good score. So your conclusion regarding fiscal responsibility may be accurate. The scores correlate to the rate of non-payment. For every statistic citing smoking causes early death, there's a George Burns who smoked cigars yet lived to 100. It's not hard wired, just a correlation.
Joe
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FICO is not a measure of how well you manage your wealth. It's a measure of how well you've managed your debt *payments*.
There may be some overlap, in that those who are good at one are likely to be good at the other. But overall, these are separate concepts.
Lenders don't care how well you manage your wealth, nor how fast it grows. They care about you paying them back on schedule.
I wouldn't speak for "most, if not all". How did Bert's remaining investments perform over the period of his loan? What rate did he get? If his car loan was at, say, 5% and his portfolio continued to average, say, 10%, Bert's not only got a better FICO score than Ernie, but he's also got more wealth. He took more risk to get there - but that's yet another axis on which to measure all of this, not an indictment one way or another. Of course, if he left all his investments in something which tanked, and his interest rate was 10%, he comes out looking pretty bad, but that's the nature of risk.
Does she? We know that FICO measures overall debt/credit ratio - in the aggregate - in which case they're identical. Carrie hasn't used 100% of any of her lines of credit, as far as we know, she's not been late making any payments it nor violated that line's limits. Are you certain that their credit scores will be substantially different?
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