The Death of FICO?

Last week, Sadie wrote about how debt free living means not being a slave to a FICO score. In the article, she pointed out that FICO has become such an integral part of our lives that even the debt free can’t ignore the score completely, which is annoying, at best. But I’ve been giving it a lot of thought and I think that this recession might be the end of FICO as we know it. I’m not ready to declare the complete death of the score because I have a feeling it will be like roaches — impossible to kill completely. But I do think that the way the score is used and how it is calculated will have to change when this recession is over.

The credit card industry and banks, in their effort to cut their liabilities and reduce the amount of open credit on their books are slashing credit limits and closing accounts and lines of credit left and right. They’re even doing this to people that have no debt, don’t carry balances and have outstanding scores. This is fine for them; it prevents all of that open credit from suddenly being utilized and not paid back. But in the process, they’re killing their best friend, FICO. Here’s how.

When FICO calculates your credit score, a huge part of that score is your available credit to debt ratio. So if you have $30,000 in available credit, but you’re only carrying $1,000 in debt, you’re score will be much higher than the person who has $30,000 in available credit and is carrying $25,000 in debt. The closer you get to maxing out your credit, the lower your score will be, even if you are consistently making the required payments on that debt. This is why some financial advisors recommend not closing a credit account once you’ve paid it off. If you close the account, you reduce the amount of credit available to you, lowering your FICO score.

Now, imagine that you’re the person with $30,000 in available credit and $1,000 of debt. You’re doing great. Now one credit card company closes your card, chopping $10,000 off your available credit. Another drops your limit by $5,000. Now you’re down to $15,000 in available credit. Then, for giggles, your bank drops your HELOC by $5,000. You’re now sitting at $10,000 in available credit and $1,000 in debt. You’re still in an okay place debt-wise, but your FICO score has, by now, dropped quite a few points through no fault of your own.

If you don’t use a lot of debt, this won’t be a huge problem, right? Not necessarily. Your score is used to determine your insurance rates. Employers use your score to determine your employability. Apartment owners use the score to determine who can be a tenant. Utilities check it to see if you should have service. A low score means you will pay higher deposits and fees if you are granted housing or utility service. And, of course, a lower score will impact your ability to replace those closed cards or get a loan or mortgage if you need one.

If you had a very high score to begin with, the impacts on your life will likely be minimal. But what if you were sitting on the borderline between a great score and an average score? Or a good score and a poor score? And then you lost whatever foothold you had simply because the credit industry decides to slash your limits? You will end up paying more for everything and possibly being denied some things you need. All through no fault of your own.

In reality, your FICO score will no longer reflect your ability to handle credit. Because the lowering of your score comes about through the actions of others, it will become worthless to judge you as a credit risk. Yet I bet many places will still place great importance on that score, even if it has been turned into complete fiction. Think there won’t be a backlash from that? My guess is that as more and more consumers realize what is happening to them and that it’s happening through no fault of their own, the anger against FICO and the credit industry will build. When those people who have never had any credit troubles are denied housing, jobs, and insurance because their score was lowered by the arbitrary actions of the credit industry, they will be mad. Smart consumers will demand to be judged on something other than a computer generated score that is no longer a reflection of their ability to handle debt. If it happens to you, rise up and complain.

What’s funny to me is that FICO is the credit industry’s best friend and it’s the credit industry that will ultimately kill it with their actions. FICO makes it oh so easy for lenders to determine who gets what. Just pull up a score and roll the dice. It takes away independent thought and decision making. But this slash and burn method of lowering credit limits is, in my opinion, going to be the undoing of FICO. FICO is already a less than perfect way of determining your credit worthiness. The actions of the credit industry will end up stripping FICO of whatever credibility it has left.

So once FICO’s been stuffed in a dark corner, what’s left? Lenders and others with whom you want to do business will have to go old school. They’ll have to actually get to know the people they’re making loans to and bringing into the workplace. They’ll have to look at the total picture of the person, ranging from employment history, to prior experiences with debt, to extenuating circumstances (like having a credit score dropped 100 points because of nothing the person did), to why they need the credit. It won’t be as easy and it will take up more of their time. But in the end, I think it will get us back to a system where decisions are made in a more humane way and in a way that lowers risk for all concerned. So here’s to the death of FICO. May the credit industry continue to dig its early grave.

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7 Responses to The Death of FICO?

  1. justme says:

    I blame the fico for a lot of the crash and burn in our economy, how many forum question have we seen over the years of people manipulating their fico

    the number was good until it was released to the public then it became trash,I have never worried about my fico I just pay my bills and have always had a great fico,but if they manipulate the fico I will not change my plan top accomadate it,always makes me grit my teeth when people talk about getting this kind of debt or that trying to raise the fico
    the fico bit is a good racket for those selling it,very smart of them ,like other finacial products make people believe they cannot live without it and convince them they love it ,masses and masses of sheeples 😉

  2. Diane says:

    I would like to believe you’re right & that this will cause a change.

    So far I’m doing okay, good score, no loss of credit availability. I was lucky, as I’d just paid off nearly all my debt (other than mortgage) before everything hit the fan.

    Others I know are not so lucky, even though they’ve handled their credit properly, paid all bills on time, etc. Credit limits have been cut, interest rates raised, FICO scores dropped…

    I’d love to see credit determined by actual behavior and ability to pay, not some weird formula that is not accurate.

  3. Pingback: The Death of FICO Scores? @ Credit Help Line

  4. Sandy says:

    It is really crazy to me that employers use your FICO to determine your job eligibility. Or course you wouldn’t give a bank teller job to someone convicted of embezzlement but my FICO says nothing about my ability to do my job. Most people are one serious, catastrophic illness (think cancer or major surgery) away from a bad FICO through no fault of their own.

    First we were all just social security numbers and now we’re just our FICO scores. That’s just horrible.

  5. dawn says:

    FICO scores are not going away anytime soon. Lenders and banks need a standardized way to objectively measure the risk of loaning a given person money, and without the FICO formula and given the fact there are 300 million Americans in this country, assessing credit risk in any other way would be hugely impractical.

    For the record, the FICO scoring formula does look at your prior experiences with debt; in fact, that’s a very large part of it.

  6. antifico says:

    First of all, the main point of this blog is to say that measures of credit will have to be modified. And yes, just because a company decides to lower one’s available credit line, even though they are up to date on payments and have a high credit score, legitimately speaking, is no justification for these ridiculous credit bureaus to lower a credit score. What incentive do people really have of paying off any bad debts, or keeping good with payments, if in the end credit bureaus, FICO and the like can toy with the score based on their own parameteres, not actual actions of the consumer. Yes, Yes, your history this and your history that, it’s all lovely, but what about someone who struggled with money all their life, never declared bankruptcy, but finally is put into a situation to remedy their old debts? Try to go and pay those old debts, reconcile things, you, initially find yourself with a lowered credit score, unless you can negotiate with meatheaded creditors to delete the entry off one’s report. Realistically speaking, judging quantitive data only in determining one’s abitlity to pay or a lender’s willingness to lend is not objective enough. Qualitative data included in this is the only true means of coming to objective conclusions. The fico score isn’t even transparent, we only get estimates as to what percentages of what features of credit go toward the calculation. Not only this, I can tell you I have duplicate and triplicate entries on my reports, that legally the credit bureaus only have get around to start investigating within 30 days. That’s slow, especially in this day and age. Better policies and practices could use to go into effect with credit policies AND INCENTIVES

  7. antifico says:

    should be in place in order to promote paying of debts, especially old debts. Either once reported as paid should immediately raise the score in a significant way, perhaps based on the outstanding debts significance (perhaps the higher the debt the more significant the raise of the score). One should also have more immediate access as to how exactly the score is being calculated. We can all do our own taxes if we have the time and patience, just simply download the tax forms and codes from the IRS. Similarly, we should have access to the specific effect of scores and not just implications of percentages and be subject and victim to the “free trials” of various free credit report web agencies and the like. And for once and for all, I understand not having any credit history or any recent credit history does not give anyone the abitlity to determine payment habits. But income certainly does. The way creditors tend to lend out a great deal of credit to perhaps many that shouldn’t be taking on that much debt, is a clear cut problem for why people are in so much debt and have bad credit scores in the first place. If you have no recent significant debt, no debt at all or no debt ever, in a rational and ideological sense, in a common sense way that should actually be a good thing. Having no debt in the first place, means you can actually take on some debt if you need to, for example, when buying a needed house.


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