Drive-thru's backing up onto streets

[HighwayStar]

They are a pretty good indicator of how much credit you can give to someone and expect to be paid back.

No they're not.  You could have a perfect credit score and be on the verge of being evicted from your home, with the utilities shut off due to nonpayment, because none of these are on your credit report.

That does not matter though. Notice what I said, they are a good indicator ie. there is a high correlation between FICO score and repayment of loans. What you describe is a theoretical edge case, but in reality it is extremely rare for that to happen, so it is not relevant.
Remember that banks are making thousands and thousands, usually millions, of loans, if a variable is accurate 95% of the time it is very useful.

[HighwayStar]

If anyone in here has the entire formula behind FICO scores, please post it.

It's a proprietary formula, as are the formulas behind calculating credit scores with the three major bureaus, but this is a good guide:

https://www.equifax.com/personal/education/credit/score/what-is-a-fico-score/

Yeah, that was my point in asking.  The fact its inner workings are secret is also very telling about its true purpose.

So everything that is proprietary or not open source has some sinister "true purpose"? You should probabally destroy whatever device you are typing this on then, since I guarantee several of its inner workings are secret. Who knows, it might just be waiting for you to fall asleep before it comes alive and starts sucking brain tissue. I hope you never have KFC or Coke either, because those might be laced with some mind control agent in their secret formula.

The reason that the exact inner workings are secret is the same reason many companies have secret formulas or processes, because it provides a competitive advantage. And yes, there are competitors to the big 3 credit bureaus these days that would like a piece of the action.

[abefroman329]

Incorrect. A low score does not allow an usurious interest rate, as by definition usurious interest rates are prohibited by usury laws.

Incorrect, incorrect, and thrice incorrect: https://wallethub.com/edu/cc/usury-laws/25568

Also incorrect in the sense that it is not a uni-dimensional problem to solve, people with really low FICO scores can often not be loaned to at even the maximum interest rate and still generate NPV.

So you know nothing about underwriting, then.  Cool.

[HighwayStar]

Incorrect. A low score does not allow an usurious interest rate, as by definition usurious interest rates are prohibited by usury laws.

Incorrect, incorrect, and thrice incorrect: https://wallethub.com/edu/cc/usury-laws/25568

Also incorrect in the sense that it is not a uni-dimensional problem to solve, people with really low FICO scores can often not be loaned to at even the maximum interest rate and still generate NPV.

So you know nothing about underwriting, then.  Cool.

That is not "incorrect", it is perfectly correct. Did  you even read the whole article? If something has no set usury rate in law, then there is no such thing as an usury rate for that product.

Actually I do know a great deal about underwriting. And your statement is so simplistic as to offer no real critique of my explanation that I cannot really respond further than that.

[abefroman329]

Incorrect. A low score does not allow an usurious interest rate, as by definition usurious interest rates are prohibited by usury laws.

Incorrect, incorrect, and thrice incorrect: https://wallethub.com/edu/cc/usury-laws/25568

Also incorrect in the sense that it is not a uni-dimensional problem to solve, people with really low FICO scores can often not be loaned to at even the maximum interest rate and still generate NPV.

So you know nothing about underwriting, then.  Cool.

That is not "incorrect", it is perfectly correct. Did  you even read the whole article? If something has no set usury rate in law, then there is no such thing as an usury rate for that product.

Did you even read the whole article?

Although usury laws are still in the books, whether they actually apply depends on the type of financial institution and where it is based. Usury laws have no effect on most banks and credit card companies, especially if they are headquartered in states with no defined maximum interest rate limits.

Actually I do know a great deal about underwriting.

So you know that extending credit and setting an interest rate are two separate processes, then.

[Rothman]

If anyone in here has the entire formula behind FICO scores, please post it.

It's a proprietary formula, as are the formulas behind calculating credit scores with the three major bureaus, but this is a good guide:

https://www.equifax.com/personal/education/credit/score/what-is-a-fico-score/

Yeah, that was my point in asking.  The fact its inner workings are secret is also very telling about its true purpose.

So everything that is proprietary or not open source has some sinister "true purpose"? You should probabally destroy whatever device you are typing this on then, since I guarantee several of its inner workings are secret. Who knows, it might just be waiting for you to fall asleep before it comes alive and starts sucking brain tissue. I hope you never have KFC or Coke either, because those might be laced with some mind control agent in their secret formula.

The reason that the exact inner workings are secret is the same reason many companies have secret formulas or processes, because it provides a competitive advantage. And yes, there are competitors to the big 3 credit bureaus these days that would like a piece of the action.

And you were talking about moving the goalposts?

Your first paragraph is blather while your second paragraph supports my original point that FICO scores are all about maximizing private profit.

[hotdogPi]

Just because something is legal (charging extremely high interest rates) doesn't mean it should be. You seem to think that corporations can make as much money as they want in any way possible and that that's a good thing.

Reiterating:

ETA:  We seem far afield of the topic of the thread.  Perhaps a split would be welcome.

[HighwayStar]

Incorrect. A low score does not allow an usurious interest rate, as by definition usurious interest rates are prohibited by usury laws.

Incorrect, incorrect, and thrice incorrect: https://wallethub.com/edu/cc/usury-laws/25568

Also incorrect in the sense that it is not a uni-dimensional problem to solve, people with really low FICO scores can often not be loaned to at even the maximum interest rate and still generate NPV.

So you know nothing about underwriting, then.  Cool.

That is not "incorrect", it is perfectly correct. Did  you even read the whole article? If something has no set usury rate in law, then there is no such thing as an usury rate for that product.

Did you even read the whole article?

Although usury laws are still in the books, whether they actually apply depends on the type of financial institution and where it is based. Usury laws have no effect on most banks and credit card companies, especially if they are headquartered in states with no defined maximum interest rate limits.

Actually I do know a great deal about underwriting.

So you know that extending credit and setting an interest rate are two separate processes, then.

The are not entirely separate processes. While many institutions do attempt to separate them in their processing, from an economic standpoint there are clear relationships between them.
For example, who you choose to extend credit to is partially based on what interest rate you can/will charge. If you are in a state with a rate capped at say 18%, then that is a key factor in your underwriting decisions, as you cannot make NPV positive loans to some people on the basis of that rate.
Likewise, who you decide to extend credit to has an obvious impact on the interest rate you then set for them.
So to say they are "separate processes" is true in the sense that they are both questions a firm must deal with, but in a macroeconomic sense you can generally view it as one process.

[HighwayStar]

And you were talking about moving the goalposts?

Your first paragraph is blather while your second paragraph supports my original point that FICO scores are all about maximizing private profit.

Lets rewind.

My question to you
How is it an indicator of profit?
Your answer
Higher the score, the more profit potential is seen by a bank.

There is a distinction between something being used to maximize profit, and it being an indicator of profit. Banks use FICO to maximize profit, which I never claimed otherwise, but your assertion that you can look at a FICO score and know how profitable that customer would be for the bank is simply wrong and misunderstands how they are used.

Your original point was not that they are used to maximize profit, but that "Higher the score, the more profit potential is seen by a bank." which is simply false.

[HighwayStar]

Just because something is legal (charging extremely high interest rates) doesn't mean it should be. You seem to think that corporations can make as much money as they want in any way possible and that that's a good thing.

Reiterating:

ETA:  We seem far afield of the topic of the thread.  Perhaps a split would be welcome.

Not sure this is even worth splitting, I think we have reached the point where everyone is entrenched in a viewpoint and further discussion is likely to be circular.

[skluth]

Yes. Credit score is basically a scam, anyway, and the concept of a credit score disadvantages poorer people who might not always be able to make payments on time.

I don't even have a credit score right now, since I'm not making payments to anything.

There's also the issue that credit card companies make way too much money, and people can be suckered into getting 1-2% cash back and then having to declare bankruptcy due to credit card debt that they weren't expecting.

You probably have a credit score even if you don't know you have one. It's something you have the moment you do anything within the US financial system. Open a bank account; you get a credit score. Apply for a student loan; you get a credit score. Regularly pay your car insurance; you get a credit score. They're not a scam; they are a tool used by companies to help determine whether it's a good idea to lend a person money. It's important to remember it's a tool, no more or less. It's not a conspiracy nor is it something to increase profitability. It's just a tool.

For those with bad credit scores and those who just don't like the idea of capitalism on any level, credit scores are evil. But the world is capitalist whether we like it or not. The only option we have is to make it better for people. Anger towards your FICO score is a waste of time. A bad score may hurt you if you're poor and need to borrow money. That's a modern thing. The old feudal/ mercantile system had usurious payments (read The Merchant of Venice). The modern system of borrowing is actually better for most people, including poorer people, than it was even a couple hundred years ago.

[Rothman]

That's my issue.

"FICO is good for you."

"Ok, let me see how it's calculated."

"No.  Just take our word for it and any future need for debt will depend upon it."

[1995hoo]

Folks, please check the quotes in your posts (use the "Preview" button) before posting. There are some illegible posts in this thread (by multiple people) and it's not the reader's responsibility to sift through the mangled quotations.

[hbelkins]

My issue with the whole "credit score" system is that information is often used for things it doesn't need to be used for, such as employment or auto insurance rates.

As to the debate over the term "usurious," it's often a matter of opinion.

[abefroman329]

My issue with the whole "credit score" system is that information is often used for things it doesn't need to be used for, such as employment or auto insurance rates.

Why?  There's a strong correlation between credit score and likeliness that you'll be in an accident, same as there's a strong correlation between credit score and likeliness you'll pay your loan as agreed.

As for employment, well, if you're drowning in debt, and the position you're being offered includes access to information that a bad actor would pay you a lot of money for, why should you get the job?

[plain]

My issue with the whole "credit score" system is that information is often used for things it doesn't need to be used for, such as employment or auto insurance rates.

Why?  There's a strong correlation between credit score and likeliness that you'll be in an accident, same as there's a strong correlation between credit score and likeliness you'll pay your loan as agreed.

As for employment, well, if you're drowning in debt, and the position you're being offered includes access to information that a bad actor would pay you a lot of money for, why should you get the job?

What does a credit score have to do with whether or not someone is a good driver??

[kphoger]

A correlation doesn't have to be a direct one in order to be useful to the actuaries.

[vdeane]

I'm surprised that nobody mentioned that credit scored actually go down when paying off a loan because it decreases one's variety of credit.  Apparently paid off accounts don't count, whereas they would if it was purely an indicator of how well one can handle debt.

[HighwayStar]

A correlation doesn't have to be a direct one in order to be useful to the actuaries.

This. 

[jeffandnicole]

...Open a bank account; you get a credit score...Regularly pay your car insurance; you get a credit score...

While it probably varies among banking institutions, bank accounts and insurance policies often are *not* reported to credit agencies.

That's my issue.

"FICO is good for you."

"Ok, let me see how it's calculated."

"No.  Just take our word for it and any future need for debt will depend upon it."

While the exact number will vary among even the different reporting agencies, basically, you pay your bills on time, your score goes up. Utilize minimal money on your credit, your score goes up. The longer you maintain a credit history, your score goes up.

If someone has some late payments, constantly bump up against your credit limits or declared bankruptcy, your score goes down.

People know their past history.  If they say their score shouldn't matter, then chances are they have a history that tells creditors it does matter.

Credit agencies have been using these scores for decades. Creditors have relied on those scores for decades. They are tried and true for a high percentage of their business.

I'm surprised that nobody mentioned that credit scored actually go down when paying off a loan because it decreases one's variety of credit.  Apparently paid off accounts don't count, whereas they would if it was purely an indicator of how well one can handle debt.

It's been a few years for me since I paid off a loan, but I think the actual decrease is very minimal.  If someone is on the line between good and fair, or excellent and good, it may affect them. But otherwise any actual decrease isn't noteworthy.  Credit utilization when someone pays for an expensive trip on their credit card, or does a lot of Christmas/Holiday shopping, has the same effect with a small decrease on the credit score. Once that payment is made to reduce/eliminate the balance, the score pops back up.

[HighwayStar]

I'm surprised that nobody mentioned that credit scored actually go down when paying off a loan because it decreases one's variety of credit.  Apparently paid off accounts don't count, whereas they would if it was purely an indicator of how well one can handle debt.

It can, but not inherently. And paying it off will still be indicated on a credit report which is to your advantage.

[jeffandnicole]

A correlation doesn't have to be a direct one in order to be useful to the actuaries.

This. 

See also: Life Insurance Policies.

If someone wants a policy with a significant payout, the company producing your policy will want to know your current health and potential health issues.

[HighwayStar]

A correlation doesn't have to be a direct one in order to be useful to the actuaries.

This. 

See also: Life Insurance Policies.

If someone wants a policy with a significant payout, the company producing your policy will want to know your current health and potential health issues.

You mean Colonial Penn won't write someone a $2M policy for $9.95 a month if they smoke 3 packs a day, live in a converted uranium mine, and bathe in Liquid Wrench? That is so unfair. 

[kphoger]

Heck, your gender affects your car insurance rate.  Why shouldn't your credit history?

[HighwayStar]

Heck, your gender affects your car insurance rate.  Why shouldn't your credit history?

Gender typically has a small effect, but age has a very large effect, and one that I would argue should be considered discriminatory (at least based on all the other protected classes out there).

Instead of age, insurers should have to use the number of years you have been licensed.