Credit Scoring

If we cut off all the thumbs of America's babies, thumb sucking would cease. So a good cure for the scourge of thumb sucking would be amputation of the opposing thumb. Sounds really stupid. Sure, it would cure the problem, but it is not the best or even a reasonable solution.

Credit scoring works on a similar idea. The idea is the score indicates the risk. When the risk does indeed pan out then it must be true.

NOT so fast. The problem is just like payday loans, the higher the cost, the less ability one has to pay the note. You pick something to buy on  credit (a car, a home, or just a vacation) you apply for credit. Generally you can find someone who will finance you. The problem is that it may cost immensely more. So a person who has to pay a larger payment each month has more problems paying than someone with a smaller one? That in itself is logical.

I am not advocating that banks and finance providers blithely loan all the money they have to anyone with no REGARD TO RISK. There are two things that would help everybody No "not this amount" or even no "not any amount." This has to be tempered by decisions based on loan officers training and instinct. Often people with EXCELLENT Fair Isaac Scores default. Sometimes those with 4-hundred-somethings default. With the same income and  monthly payment amount, the reason the one with the better score does better is simply that he can get more credit to help him through the rough spots. The guy with the dismal score just has to take it on the chin and get behind. 


In a nutshell, I believe the accuracy of the FICO scores is more about the debt load the marginal or bad FICO score puts on a borrower than the predictability of the score.