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Smart Shopper Credit Scores and Vehicle Financing
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Default Lines: The New Math Of Credit Scores by Jane J. Kim Thursday, December 20, 2007 provided by The company that cooks up credit scores for millions of Americans is changing its recipe -- and that could affect how easily you get credit in the future. Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%. More From The Wall Street Journal Online: • 12 Ways to Make Your Kids Financially Savvy • Estate Planning Has Gone to the Dogs • Converting IRA Assets to a Roth Account The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit. The FICO score, which Fair Isaac says is used by 90% of the 100 largest banks, and other similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cellphone usage and, in some cases, employment and utility services. Some consumer groups have raised concerns about whether credit scores are being used properly and whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, the legislative director for the Consumer Federation of America. Credit scores, which are calculated using proprietary models, also are criticized for a lack of transparency. "This is a product, per se, but it's a product that has inordinate influence on the financial lives of hundreds of millions of Americans," says Mr. Plunkett. Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into calculating the FICO score and in guiding consumers on how to manage their scores. Consumers could start seeing the new FICO scores by the spring, though some lenders may take additional time to test the system to see how it works with their business and loan portfolios. Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders' demand for better risk-management tools. The latest version of the FICO score will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores. But the new model will more finely slice and dice the information in consumers' credit files to do a better job of separating the "good risks" from the "bad risks," particularly for subprime borrowers; those with "thin," or young, credit files; or consumers who are actively seeking new credit. "Those are the communities that lenders are most interested in" to determine credit risk, says Craig Watts, spokesman for Fair Isaac. "Consumers who are low risk will score better with the new FICO version, and consumers who are high risk will score lower," says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site. Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles -- though they may have gotten approved for credit accounts in the past -- will start to get better deals from lenders, he says. Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit. FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person's score could drop if he or she has multiple delinquent accounts. "Overall, more consumers will see their FICO scores go up slightly than will see their scores drop," says Tom Quinn, vice president of global scoring solutions for Fair Isaac. Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate. If consumers feel their FICO score is unfair, they would have to go to the individual credit bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., for a copy of their credit report on file and look for any errors or missing information. If there are any, they would have to contact the credit bureau or the financial institutions to dispute those errors. FICO 08 also aims to curtail the growing business of allowing people to polish their credit by "piggybacking" on someone else's good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won't take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score. FICO 08 is likely to face some competition from VantageScore Solutions LLC of Stamford, Conn., a joint venture of the three credit bureaus that was rolled out in 2006. Fair Isaac has sued VantageScore and the three bureaus, accusing them of using unfair and anticompetitive practices to harm the FICO brand. Recently, Equifax linked the suit with the launch of FICO 08. The company has said it wouldn't move forward with FICO 08 and that its relationship with Fair Isaac remains "strained" until the lawsuit is resolved, says David Rubinger, Equifax spokesman. The new FICO model has already been distribu
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Replying to: joel0622 (Jan 04, 2008 10:17 am) Copyrighted, Dow Jones & Company, Inc. All rights reserved. "Imports are superior" |
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My experience is that creditors look at the total package....not just credit score, but history, employment history, the type of job you have and your assets. Truth be told, there are some people with too high a credit score. Say what? Businesses look at this all the time. Having too high a score means that you may not be leveraged enough and taking advantage of deals available to you. Credit score, while important, is just one factor. If it is over 750, you really are in great shape shape no matter what. And, if you have income and solid history, you will be able to do a lot more then someone with a 790.
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Replying to: waterdr (Jan 19, 2008 9:04 am) With that said, I would not be comfortable with a payment over $450, so that limits me to moderate priced cars. I could qualify for 1K, but it would stretch me significantly. Now, many people with scores in the 500's or 600's (not all, but some), think that if they qualify for the loan then they can afford it. I know it is not true. Heck, if I wanted to, I could go into 90K debt on the cards in my wallet right now. |
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Replying to: waterdr (Jan 19, 2008 9:04 am) Banks start w/ the score. If your score isn't right, even if its only 1 point below the tier you want, you aren't getting that tier. For the captive lenders, GMAC, Ford Credit, American Honda etc, score is secondary. If everything else is in line, someone w/ a lower score can still achieve an A rate. Finally, I have NEVER heard of anyone having too high a score.  Absent other factors of course. A college kid could have a $500 VISA card that they pay like clockwork, but unless they have a big downpayment and a good job, they aren't getting bought. |
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The people I can't understand are the people with BAD credit who still think anybody is going to finance them. We don't do "special" or subprime car loans. That is a dirty business that we stay away from. Once in awhile I'll get someone with HORRIBLE credit or a recent BK that just can't understand why they can't get a car loan! ????
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Replying to: isellhondas (Jan 29, 2008 6:41 am) We don't solicit for the business but are capable of handling it if they come in. Any beacon score 520 or better does not worry me. I can get you done on A (maybe not the one you want) car as long as you don't have a repo on your last auto loan and are not past due on your house. There are sources for the sub 500 scores but the buy fees are usually in the $1000's of and we opt not to mess with them. The only person they benefit are the lender, not us or the customer. |
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I recently purchased a new car for aprox. 26K OTD. Even though I have a credit score close to 800 I was worried about financing because my income varies from month to month and is hard to document (cash business). So hat in hand I approached my credit union. To my surprise I found that they were falling over themselves to loan me almost any amount I wanted. I gave them a conservative estimate of my income over the phone and was approved. It was their top tier rate too. They had a higher rate listed as well but that was for "You know, those people who don't pay their bills." Why they would lend money to some body who didn't pay his bills was beyond me. Fast forward to the car dealer. I noticed that they were offering 0% interest for 48 and 60 months. I asked about this and the salesman almost offhandly said "Those rates are only for top tier customers, especially the 60 month deal." I showed him my most recent FICO score and I swear he let out a gasp. From there everything was fine. I didn't need to show proof of income or anything. Just $100 on my credit card and a few days later I drove the car away. As I was signing the paperwork I commented how smoothly everything had gone. To this the salesman commented: "You would not believe some of the deadbeats who come in here looking to finance cars. It sometimes takes weeks to get someone to loan them money." He went on to say that the bulk of his ups these days had bad to terrible credit. What is wrong with people today?
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Replying to: oldfarmer50 (Jan 29, 2008 9:49 am) Guy comes to me for "free advice" on how to prevent BK. Had $300k mortgage and $60k in car loans of a $60k income. I told him to sell his cars and move down into a cheaper used cars and that his house is out of line with his income. "Maybe *YOU* can live like that, but I am not going to." When I bought my new car last year, I was EXPECTING the hard sell on a financing deal. However, when I told the guy I was paying cash, he looked pretty relieved that the deal would go through quickly. |
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Replying to: oldfarmer50 (Jan 29, 2008 9:49 am) |
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