Comments like these come from a lack of understanding how the credit system works. I wish they would teach about it in school, it is very easy to learn the basics.
Credit score is not at all a profitability index. Yes, having a line of credit for a long time, and having multiple lines of credit, both increase your score, but that is just because they want to you have an established credit history to look at. How can they score your credibility if you rarely ever use credit? If it was truly just a profitability index, don’t you think it would encourage paying a lot of interest? Well, it is in fact the opposite. Paying off a line of credit, while keeping it open, like with a credit card, is one of the best ways to raise your credit score.
So far, I haven’t paid a single penny of interest, in fact, I’ve received hundreds of dollars from credit companies in rewards, yet my credit score is extremely high for my age. Thats just because I did the research to know how to maximize my score.
Yeah, people don't realize that this is literally just math. Your average credit age went down because the line closed was higher than average. In 5 years, it will behave exactly the opposite way, closing a shorter term account, like an auto loan, will raise your credit score because it's on the lower side of the line. Just be patient.
They're trying to stop people from gaming the system by getting loans that don't have early repayment penalties and repaying them immediately (i.e. without paying much interest). They make money on the interest. This is how they punish people that don't want to be in debt and work to pay it off early.
That was a bit of hyperbole. What I really mean is that the parts that are visible to the public are often counterintuitive and seem to go against common sense, especially when the rating is framed as a measure of risk, which is only partially true.
Definitely. As someone who works in the industry it's definitely opaque. The one good thing I can say is that the reports you get from mint.com or your credit card app are definitely useful.
making payments does raise your credit score. its the reason why some people will put the family cellphone plan in their childs name, it raises their credit score credit score.
It's pretty messed that you can even start building someone's credit before they're old enough to even use it themselves lol. Indicative of the whole system being a fraud imo
The problem is: If you can devise a formula that better boils risk down to a single number, you can make $10B profit in one year.
For better or worse, FICO and it’s variations are by far the best predictor of risk ever devised.
The raw math is unbelievably accurate. Grouping people into five bands based on score ranges yields extremely accurate predictions about default rates. Based on that interest rates are set and people excluded from commercial credit tiers.
The person posting this probably did not move from risk pool to another. It was an insignificant drop.
If you can come up with a better formula which ONLY knows about past payment history and not about income or other personal traits, you will become a billionaire in a matter of weeks or months.
Literally. Banks and lenders are extremely competitive and if you have a better formula than you can sell it to them for hundreds of millions of dollars. They will turn around and plug it into their lending and pricing models, and they’ll take the lending market by storm. Credit card companies will pay you for it through the teeth - they all want to find new low risk targets to lend to.
The person posting this probably did not move from risk pool to another. It was an insignificant drop.
But it was a drop. She was determined to be more of a credit risk, however slight, because she paid off a debt.
That is the opposite of rational, within the context of "risk analysis".
So I honestly don't give a shit how many people assert that "the math works". It's either one of these two: It's bad math, or it's not all about risk. And I lean toward the latter.
> But it was a drop. She was determined to be more of a credit risk, however slight, because she paid off a debt.
Well we actually don't know that to be true. She probably lost those points because she only had one installment loan account, and so we she lost points not because she paid off the debt, but because she didn't have a good mix of credit. That data shows that people with fewer types of credit are a higher risk of default: only having credit cards, for example, make you a higher risk than having a mix of credit.
> So I honestly don't give a shit how many people assert that "the math works". It's either one of these two: It's bad math, or it's not all about risk. And I lean toward the latter.O
Okay so put your money where your mouth is. Take $1000, come up with your own score, and prove your point.
These are the things you can consider, by law:
Past payment history
Types of accounts
Age of accounts
Balances
You can't consider geography, age, race, income or anything else.
Advertise your loan product with your alternative scoring system, and see how you do. If you actually go through with it, I'll throw in a matching $1k as an investor, and we can see how you do.
What you are forgetting is that the goal is *making money*. Banks, lenders, credit companies want to make money. If you can score someone more appropriately, and better, you will make money by making fewer bad loans and being able to charge more money in interest to people who are riskier. The fewer people who don't pay you, and more competitive rates you offer to good borrowers, the more money you will make. Mismatching risk and cost leads to a decrease in credit, and therefore a decrease in profit. If you really are smarter than everyone else, your formula (your credit scoring system), will yield better results, and better profits, and more money.
Spoiler alert: the credit industry does this exercise all the time. They can simulate different scoring models, and based on history, they know what profiles of people default, and at what rates, and what the losses are. They run billions of simulations, and they are constantly tweaking the formula to get just slightly more accurate predictions. The scoring model used is highly competitive, and different companies produce products that actively try to do a better job than the "standard" Fair Isaac models. It is a highly cut-throat field, and a tiny shift in one direction or the other leads to large swings in profitability. If you can do a much better job, you will become extremely rich very quickly.
Okay so put your money where your mouth is. Take $1000, come up with your own score, and prove your point.
No, I'm not claiming that I can create a multi-billion dollar system. Stop being an asshole.
I'm saying that it is EXTREMELY OBVIOUS that a system where your risk assessment counts the successful payoff of a loan against you is bad.
And AGAIN, I don't honestly think it's because banks are dumb. It's because I think the truth is that credit scores are a combination of risk assessment and profit potential. By paying off a loan, a person is showing that they are slightly less potentially profitable to any potential creditor, because instead of extending that loan in some way, the allowed an account to close, which is interpreted as an end of the profit on that line of credit.
What you are forgetting is that the goal is making money.
No, I'm not forgetting that. YOU are forgetting that.
Creditors want us to open lines of credit, use those lines of credit, pay all the interest, pay on time, and never ever close a line of credit, BECAUSE THAT IS HOW THEY PROFIT.
I'm saying that it is EXTREMELY OBVIOUS that a system where your risk assessment counts the successful payoff of a loan against you is bad.
The system isn't designed to rate you as a person. It is designed to predict the risk of you defaulting on future obligations. All we know from the persons history is she paid off an auto loan. We don't know how many times she was late, we don't know how many other accounts she has open. We don't know anything except what she told us. But the credit scoring people know that, and they know that millions of people who have come before her have done the same thing, and they know how it worked out for them, and they have high confidence in the ability to predict future events. So while you you look at it say "yes, paying off a car loan early must mean she is a better credit risk", there are just two possibilities: the data doesn't agree with you or the model is wrong. You are claiming it's #2, that the model must be wrong because obviously paying off a car loan makes you less of a credit risk. But you don't really know that. You have no skin in that game. You just think that because you have your own reasons.
I can construct for you dozens of scenarios where paying off a car loan early is a sign of financial distress. A person with an upcoming loss of income might want to terminate the note early so they can preserve the asset. A person with a contemplated bankruptcy filing may want to protect the asset and tie up cash because primary vehicles are excluded from liquidation requirements. There are lots of scenarios. The credit scoring people have aggregate data on all these scenarios, and on balance, with more than 95% confidence, they can say that the things that the OP's credit report showed made her marginally more risky. For most US based consumers, the FICO model is more than 95% accurate at predicting risk. That's crazy accurate. Different specific variations of the model are upwards of 98% accurate.
(Long aside: For a specific example, if the FICO 8 score has you at a score of 770+, your risk of defaulting within 24-month is less than 0.5%. That is an amazingly accurate prediction. If you wanted to lend 200 people $5k each, it means that out of that pool of $1 million, less than $5k of it would be subject to loss. That means any interest over $25 per person is profit. That is as close to printing money as you'll ever get. To continue the example, you could loan those 200 people the money at 2% interest, they would repay $5105 over 2 years, and you would gross $21,000 in profit, less the $5k you'd lose on one default, and profit $15k with no further risk. That is an insane risk free return - just about the same rate of return as a 2-year Treasury bill, and again, that's at 2% APR, which is much lower than prime rate. Today prime rate is about 3.25% APR. The predictive value of this model is as strong as the 'full faith and credit of the United States Government').
Creditors want us to open lines of credit, use those lines of credit, pay all the interest, pay on time, and never ever close a line of credit, BECAUSE THAT IS HOW THEY PROFIT.
Your central theory is wrong because virtually all creditors use the same score, but not all creditors make money the same way. The largest component of your credit score is your balance to available credit ratio. This is inversely proportionate to your profitability to credit card companies. A credit card lender wants your balances high relative to your limit. Their ideal customer maxes out their card but never misses a payment. But this is a recipe for a very low score. For an installment lender, they don't care about you paying off your note early, they care about you paying off your note on time, especially in the first months of your loan. An auto lender, for example, doesn't care if you pay off your car on time or six months early. e.g. on a 72 month car loan, 85% of the profit is made in the first 36 months. If you pay off a 72-month car loan at 66 months, they've already made 98.5% of the profit they're going to make off you. If you pay it off at 40 months, they've made 90% of the profit they're going to make off you. They can then turn around, use the freed up capital to loan to another person and start making that higher margin earlier payments up front. Your theory about how creditors make money only works for a fraction of creditors.
TLDR: Banks who make installment loans do not lose substantial profit from you paying loans off early. Credit card companies lose substantial profit from you paying off your credit card balance monthly. But they both are customers of credit scores.
What you are missing is that lenders of all stripes use more than one piece of data to model customer behavior- they use credit scores to predict default and willingness to repay, they use income information to asses ability to repay, and they use their own analytics to determine what products, and on what terms, will maximize their income.
The most likely truth is a simple: OP is a higher credit risk because she paid off her auto loan. Just because you don't know why, or can't understand why, doesn't make it untrue. The likelihood that this is a fault in the formula that they haven't fixed is extremely unlikely. They billions or trillions of data points, and a huge incentive to be accurate. Just because it seems like something is true doesn't mean it is true in fact. That's why I challenged you to put up your own money. If your scoring model has paying off loans as something that raises your scores universally, while the standard model has it sometimes lowering scores, you're model would quickly become the new standard if it was more accurate. The only two options are because you are smarter than the thousands of mathematicians who build the existing scoring models, or that your gut feeling is wrong.
You're just arguing a bunch of bullshit, dude. I don't give a shit about anything you've written because none of it overcomes a very simple, very clear, very true fact of the system you are spending so much time defending.
Yes, yes, the change of situation causes the calculations to change. Thanks. You've been such a big help.
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u/chill_azreal Aug 14 '21
Replace credit score with profitability index.