P
pfdigest
Guest
There’s a fascinating new WSJ article, “FICO Recalibrates Its Credit Scores” that is worth your attention. The lede:
Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.
The medical bill thing may make sense since otherwise creditworthy people can get torpedoed by medical expenses. What concerns me is the part about bad debts being excluded once a collection agency has extracted its pound of flesh.
The whole point of a credit score is to predict your chances of going delinquent. Saying that someone has a 780 FICO score if you don’t count those three settled credit card chargeoffs is like saying someone has a pretty good driving record apart from those three DUIs.
Why the changes? Read on:
The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.
The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores.
I may be reading too much into this, but the phrase “discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk” sounds like there’s some pressure to loosen underwriting standards. Is the pressure coming from the government in the name of expanding credit access, or from banks who want to book more short-term profits, or what? I have no idea. We saw both do-gooding and short-term thinking in the real estate credit markets last decade and that did not end well.
Hopefully I’m wrong and nothing bad will come from this. If I’m right, I’d expect credit card divisions will get a nice bump in their profits over the next year or two as they book a bunch of new accounts. With more profits, account valuation models will tell the marketing departments that in fact they can offer even higher bonuses and still come out ahead, so I’m hoping this will lead to a year or two of abnormally high sign-up bonuses.
Bank lending is a perpetual tug-of-war between sales & marketing on the one hand (“Book that loan now and worry about it later!”) and risk management on the other. Risk has mostly been in the drivers’ seat ever since the credit bubble popped several years ago, but perhaps things are reverting back to normal, at least until the new bubble pops.
Finally, I can’t tell from the article if this would work, but consider this scenario: run up a few hundred thousand dollars in credit card bills. Charge off. Wait until the debts are sold to collection agencies for pennies on the dollar, then settle. Rinse. Repeat. Feasible?
Continue reading...
Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.
The medical bill thing may make sense since otherwise creditworthy people can get torpedoed by medical expenses. What concerns me is the part about bad debts being excluded once a collection agency has extracted its pound of flesh.
The whole point of a credit score is to predict your chances of going delinquent. Saying that someone has a 780 FICO score if you don’t count those three settled credit card chargeoffs is like saying someone has a pretty good driving record apart from those three DUIs.
Why the changes? Read on:
The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.
The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores.
I may be reading too much into this, but the phrase “discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk” sounds like there’s some pressure to loosen underwriting standards. Is the pressure coming from the government in the name of expanding credit access, or from banks who want to book more short-term profits, or what? I have no idea. We saw both do-gooding and short-term thinking in the real estate credit markets last decade and that did not end well.
Hopefully I’m wrong and nothing bad will come from this. If I’m right, I’d expect credit card divisions will get a nice bump in their profits over the next year or two as they book a bunch of new accounts. With more profits, account valuation models will tell the marketing departments that in fact they can offer even higher bonuses and still come out ahead, so I’m hoping this will lead to a year or two of abnormally high sign-up bonuses.
Bank lending is a perpetual tug-of-war between sales & marketing on the one hand (“Book that loan now and worry about it later!”) and risk management on the other. Risk has mostly been in the drivers’ seat ever since the credit bubble popped several years ago, but perhaps things are reverting back to normal, at least until the new bubble pops.
Finally, I can’t tell from the article if this would work, but consider this scenario: run up a few hundred thousand dollars in credit card bills. Charge off. Wait until the debts are sold to collection agencies for pennies on the dollar, then settle. Rinse. Repeat. Feasible?
Continue reading...