FICA and Credit Ratings

[Shalmanese]

So whats the deal with the US system of credit ratings? From what I've heard on the board, nobody has anything good to say about it and it seems to distort behaviour just to get a decent rating.

Is FICA a government derived measurement? Do all banks have to follow FICA rules? Is there any push to change FICA to make it more realistically reflect a persons true credit risk?

[DrDeth]

No, but I don't think you mean FICA (that's Social Security), you mean FICO. FICO ("Fair Issaccs... "? is entirely a private business and proprietary. Despite it's great limitations, few Mortgage lenders are willing to get along without it- most depend on it 99%. What's worse is that other companies- Landlords, Insurance Companies, and of course Credit card comapanies- and what's worse, some employers are starting to get a Credit report and score on potential new employees!

[groman]

What's wrong with FICO? I've never heard anybody complain about the credit history system in the US, and personally think it's pretty damn neat.

[Drum God]

Originally Posted by groman

What's wrong with FICO? I've never heard anybody complain about the credit history system in the US, and personally think it's pretty damn neat.

Well, my score is over 700. I went to a Sears to buy a refrigerator ($1800 after taxes and delivery). They had a neat rebate offer that would have saved me $$$ if I opened a Sears charge account. I actually planned on paying cash for the fridge, but the rebate deal roped me in. I figured I'd charge the fridge then pay off the card. Well, CitiBank carries the paper on Sears charge cards (It's actually a CitiBank MasterCard with the Sears logo). The girl at Sears entered my info into the computer and a few seconds later my credit was denied. Huh? So, I went ahead a paid for the fridge and went home.

Guess what was in the mail??????? A "pre-approved" credit card offer from -- you guessed it -- CitiBank!!!!!! And what's more???? I already have a CitiBank card with more than enough available credit to have bought the fridge. And that account (along with my other accounts) is paid up and on time.

No, nothing's wrong with the credit history system in the US.

[friedo]

Clearly the problem here is with Sears, not your credit history. They could have denied you credit for any number of reasons: A mis-typed address or SSN, suspicious activity on your report, they felt you had too much credit despite your excellent score, or they just didn't feel like making any loans that day. Despite common perceptions, your FICO number is not the only datum consulted when creditors are considering your worthiness.

It's impossible to come up with a mathematical formula to accurately reflect the worthiness of a potential consumer, of course, but FICO does its best to reward people who use credit responsibly and have a proven track record. If you are distorting your behavior to improve your score, you're probably distorting it in a way that leads to better use of your credit.

[TJVM]

To the original poster: Does the credit-rating system in Australia work differently? If so, how?

[Shalmanese]

AFAIK, theres no central "number", each bank does it thier own way. Typically, you bring in enough proof of your credit-worthiness and they give you a card.

[gotpasswords]

Unrelated to FICO, Sears cards have been notoriously difficult to obtain for some time. Not sure why Citi is so stringent when they have the opportunity to rope in people buying major appliances at 23.65%

[groman]

Originally Posted by gotpasswords

Unrelated to FICO, Sears cards have been notoriously difficult to obtain for some time. Not sure why Citi is so stringent when they have the opportunity to rope in people buying major appliances at 23.65%

It might have something to do with the demographic of Search shoppers applying for cards vs. general population. It could be a "risk group".

[Walloon]

Originally Posted by DrDeth

No, but I don't think you mean FICA (that's Social Security)

Social Security and Medicare taxes.

[Mr. Slant]

Might the OP be thinking of "FACTA, The Fair and Accurate Credit Transactions Act" [1]?
In any case, there are dozens of different scores available from a handful of different credit scoring and reporting agencies.
FairIsaac [2] provides the bulk of the business logic to these agencies. The scores are commonly referred to as FICO scores, but in fact there are multiple scores that can legitimately be called FICO scores. Beacon is one of the names for one of the scores, but I forget the other.
Is the system mandated by any branch of the US Federal government?
No. I believe there are some quasi-governmental agencies in the home lending business that pay some attention to your credit reports, but I don't know if they care about scores or actual tradelines on your reports.
The credit reporting and scoring system in the US is a creation of private industry.
Does the system work?
The credit scoring system itself works for a population, but NOT for individuals.
Using it for underwriting will work better than using a bad bank loan officer.
Using it for underwriting will NOT work better than using a really good bank loan officer, especially if he knows your individual circumstances and your reputation in the community.
Fair Isaac has made presentations to congress demonstrating that its scores serve the purpose of helping financial services companies.
The biggest problem is that a LOT of credit reports are missing relevant information. Some credit reports have wholly inaccurate information on them.
For instance, I've never robbed a liquor store. However, a man with my last name did, and then he never finished paying his defense attorney.
It went on my credit report. Easy enough for me to get off, but it still gave me a wholly bogus score and made me have to wait 2 weeks to get some financing.
Garbage in, garbage out.
Want to learn more about credit reports and scores?
Check out the links at [3].

[1] http://www.privacyrights.org/fs/fs6a-facta.htm
[2] http://www.myfico.com/
[3] For more on credit:
http://consumers.creditnet.com/straighttalk/board/
http://www.artofcredit.com/board/
http://creditforum.org/

[Balthisar]

I have an excellent credit score but with a fraud alert (former victim), so I generally have a hard time securing new credit without jumping through hoops to establish my identitfy. This suits me fine; it just means I can't walk in to Best Buy and demand instant credit.

[Philster]

The U.S, credit system is 99.95% reliable. Trouble is, with hundreds of millions of transactions per month, you wind up with thousands and thousands of instances where something doesn't jive.

In the example where you are denied a Sears card backed by Citibank, and and then going home and getting a pre-approved card offer from Citibank, you are just not being fair about the comparison.

For example, I could be denied my Sears card because the Sears card results in free financing for x months and me walking out with an appliance. The risk is higher for the lender. The pre-approved offer is a different offer, for different levels of credit, coming at a different risk to the lender.

The process is being modelled around the globe. Some improvements have been made over the years. If anything, in our society in the U.S., many fear racism and bias. Scores remove these components.

[Mr. Slant]

Originally Posted by Philster

The U.S, credit system is 99.95% reliable. Trouble is, with hundreds of millions of transactions per month, you wind up with thousands and thousands of instances where something doesn't jive.

SNIP

Philster, while I always appreciate your input on this topic, I think your percentage is a little bit off.

Let's take the following quote from a study with an N of 51[1]:
"...In 43 percent of the files, reports on the same accounts conflicted in regard to how often consumers had been late by 30 days. In 29 percent of the files, there was conflicting information about how many times the consumer had been 60 days late. And in 24 percent of the files, conflicts existed about 90-day delinquencies. Reported delinquencies have a large effect on credit scores."

Granted, the N is low on that study, but the numbers are scary.

[1] http://www.consumerfed.org/releases2...corereport.txt

[groman]

Those aren't that scary unless we have more data.

They're comparing conflicting reports from different reporting agencies. Unless specified, it's safe to assume that information is just out of sync, not incorrect.

[Philster]

Originally Posted by Mr. Slant

Philster, while I always appreciate your input on this topic, I think your percentage is a little bit off.

Let's take the following quote from a study with an N of 51[1]:
"...In 43 percent of the files, reports on the same accounts conflicted in regard to how often consumers had been late by 30 days. In 29 percent of the files, there was conflicting information about how many times the consumer had been 60 days late. And in 24 percent of the files, conflicts existed about 90-day delinquencies. Reported delinquencies have a large effect on credit scores."

Granted, the N is low on that study, but the numbers are scary.

[1] http://www.consumerfed.org/releases2...corereport.txt

Well, most errors do not affect approvals/denials. Sorry.

[Mr. Slant]

Philster, I wasn't taking issue with your feeling that the credit reporting system mostly works. I was just nitpicking the 99.5% number, which is somewhat obnoxious of me, but due to the level of inaccuracy in credit reports I believed the fight against ignorance justified it.
We could also discuss Capital One's refusal to ever list an individual's true credit limit, but that's a side point...

[groman]

I'd LOVE to hear the Capital One thing. I've had numerous cards from them over the years and besides the fact that they call, mail and just overall suck every hour or so, I didn't notice anything peculiar about their credit scheme. Are you saying the true credit limit is below or above the one listed on the account?

[Mr. Slant]

Capitol One has a bad habit of reporting your "credit limit" as the highest balance you've ever had, rather than your true limit.
So, for instance, I have a Cap One card with a $10K limit.
I have never had more than a $4K blance, because that's the highest I ran the card up (on my honeymoon).
So, after the honeymoon I pay the card off entirely.
A year later I charge $3K worth of sweaters at LL Bean 'cuz hey, what can I say, I love yuppie clothes.
After my next statement date, they update the Cap One tradeline on my credit report with my $3K worth of sweaters.

Now the tradeline will read:

Creditor: Capital One
Type: Revolving Credit Card
Date Opened: Blah Blah 2002
Balance: $3K
Credit Limit: $4K
along with some other info, like whether or not I pay late.

If the FICO machine comes along and crunches the numbers, it looks like I'm a credit-card-maxing-out fool with 75% of my credit card used. In fact, I'm only using 30%. If Capital One is my only card or one of my larger-balance tradelines, this will likely hurt my score. Not tons, but likely by quite a few points. Enough to make me not get that awesome mortgage I was trying to get.
One workaround would be to just charge a $9.75K item you had the cash to pay, let it make it to a billing cycle, and then pay it off in full. Then the tradeline would be reporting NEARLY accurately.
Some people think Cap One is just being weird.
Others thing Cap One is intentionally hosing their customers to keep them from getting credit from Cap One's competitors.

Doesn't really matter to me, personally, but I'm sure if I played shenanigans like that I'd be doing federal time like Martha Stewart was.