Macro Economic Trends and Risks
New Credit Score Math doesn't Add Up

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By GuyLeap
December 20, 2007

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Credit scores are a silly game for many.

The problem is they try to tease out an estimate of future probability of non-payment using more data than past non payments. In many cases the way the use this data is utter nonsense. They fail to account for assets of any kind & fail to look at the interest rate on the debt.

I.e. a borrower with a $100k home 2nd loan fully drawn is penalized even if they have $200k in the bank & the home loan is at 3.75% interest. From a financial planning point of view fully drawing this credit line is a smart thing to do.

I once increased my credit score by 100 points in 40 days by just paying down a home equity line. I used to get quite irate about the whole thing since my score was being lower for things that were good to do. Then I figured out how to just go along. I gathered a great deal of info about it. I have two 4" binders full of my past credit scores & I reviewed them for things that changed the score between reports.

But this new system is even more stupid & now I have to learn a new system. Here my score will be lower because I bought my cars with all cash & don't have any car loans! Because I don't choose to finance a depreciating asset with a loan my probability of future default on debts is HIGHER! That is non-sense.

Maybe it will be lower because I don't have any rented furniture. Or any jewelry on lay away. I don't have a Sears card because I use debit cards for all my transactions. Clearly I'm a higher risk than the person with the 10 store cards, and financed jewelry, furniture, and cars ....

I think they should rename this score for what it is: "Rating of likelihood they will pay us high rates of interest for long periods of time." OR "Ideal Host."

What they really want to know (and are ranking here) is: are you able to pay interest charges, and will you do it for a long time? They want to suck you dry but not kill you. Okay, I think you see my point.

This is not a rating of your actual probability to repay debt, because they don't want you to repay the debt. They want you to pay interest on the debt. That they pass it off as Credit worthiness frankly makes me a little sick in my tummy.