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?
For any creditor that reports lates to the Credit Reporting Agency, having the collection no longer count does not make your credit suddenly appear perfect. It just means you aren’t getting dinged twice, once for the 90 day late and once for the collection itself. IE, nothing in this suggests that the late payments will stop getting counted against you.
Right, but don’t the 90-day lates fall off a lot more quickly? Two years or something?
I’m not concerned. For one, banks take forever to change FICO calculations (they just updated to the model released in 2008). Second, not every bank uses FICO.
Paid for deletes were already exceptionally common, so it’s not surprising that they made this change. At the moment there is no incentive to pay charged off debt, unless you’ve received a court order.
It’s kind of a moot point at this stage anyway, no lenders have signed on to use FICO 9 at the moment and it’s likely to be several years before any do.
Looked it up, 30/60/90/120 day lates are 7 years.
Interesting, thx.
TJ beat me to it by about… 7 hours. Of course, the lates (do not confuse with lattes) will still be sitting there, highly visible, and they will tell the lender exactly what they want to know. I’ve had the time to think about it and it seems to me — more and more — as a sting operation. Sure, settle the debt now, but still do not expect the clean slate.
Unless they want their money back quickly. 🙂
My concern is for the alleged borrowers. SO many people have had collection agencies come after them for accounts that aren’t theirs–same name, SS number off by one or two digits, a family member who stole their identity, etc. And now the scum of the earth debt buyers have a new weapon to use, telling people that paying WILL erase the collection account.
While it’s true that late payments stay on your account for 7 and a half years (charge off +7), in reality the two years that was mentioned is more important. If someone got into a bind two years or more ago, and has, since, been an exemplary borrower, both the potential lender and the FICO score will make note of that.
FICOs rise as lates and charge offs fade into the past. And lenders are more concerned about how you are handling credit NOW than how you handled it 2 years ago.