FICO model is flawed - a shocking story

Found this story yesterday on the web:

Based on my recent credit experiences, although the calculation proposed in the FICO looks good it is depending on data input from several credit corporations and banks that offers a great door to unfair credit scoring. I explain myself; my score was greatly lowered recently.

I investigated the issue to discover that I had a pending 100$ balance on an old phone service that I canceled in 2004. The company just sat there and tried to mail me to my old address with obviously no success. We are in 2007 now and they still never managed to reach me, that is, even after giving my account to a collection agency. My phone number and address are publicly available. Anyone can find me and eventually call me.

Nobody called me and my account has been delegated to 3 different collection agency since 2004.The original company plus the 3 agencies. That makes 4 entities that didn't really bother to find me for the 100$ that was due. They sent mail that I never got.I just recently ordered a credit report for myself because I wanted to see where I was standing. Surprise! Very low score, main reason, I had a collection agency registered on my profile and a 100$ balance due. Probably sitting there since longtime...

I'm the one who found the agency, called them and told them that I owed them 100$ based on my credit report. I wanted to know why and where this balance was coming from. After spending a day on the phone I discovered what it was and I paid the freaking little 100$. I called the original company, they could not care less about the fact they put me on this bad situation by reporting me to the credit reporting agency without ever speaking to me first. If I would have been aware for a second that I had a 100$ balance with them, I would have paid it!!!! I mean come on!!!

They mail to nowhere and then they send my case to collection! No one ever called me. (A telecom company!!!!)

Worst thing is, statement from my credit report: "Bear in mind that satisfying that satisfying or paying off the collection item or derogatory public record will NOT remove this information from your credit bureau report. The fact that it occurred is still predictive of future repayment risk, so it will still be considered by the score. (For 6 years)" Ya right Columbo, you're such a great detective that you think the way the telecom company handled my account is 'predictive of future repayment risk' for me!!!!!????!!!!

I called the Telecom company about it. "Sir there is nothing we can do, it did go to collection, the report is right!" I replied, "Well you can certainly do something about it, write a letter to the reporting agency to explain the situation" "We don't do that sir, we never did and never will. We are big and blablabla"

I could not believe it. I called Equifax about it; they could not do anything about it. To all these people, my account has been sent to collection for real and the report is good. FICO is dependent on the companies that feed its data input...

I don't know what to do anymore. Equifax and the telecom company are on the other side of the fence, holding there hands together like an old couple and are laughing at me, the little circus pet.

How about we implement a credit scoring system that will need a log of the actual communication attempts that led an account to collection. What if we implement a credit scoring that will consider collection as: first, an attempt to locate the individual. Second to probe the intentions of the individual in regards to the balance due? (I pay you immediately = good score, I refuse to pay = bad score)

How to make this system proof again bad handling of corporations that are "too big" to keep a good business relation with it's good client that are fully willing to keep things straight and pay the bills on time?

Since I learned all of this, I'm against credit verification to the bone. Especially if it's NOT to lend me money; like the the owners of apartments, and all other type of entities that I pay before usage of the service.

Especially insurance company that I will pay entirely on one shot! What do you want to check me for, I pay you up front! Plus every time people check, your score goes down! Only a bank lending you money should have access to this kind of tool.

Well, I've always been a good payer that honors his debts, now corporations and computers have affected my reputation badly. Nobody wants to lend me money no more, looking at me like the 'bad payer' that I'm said to be...

FICO is a dangerous tool, watch out folks!

I agree with you on this. Clearly the system is broken when no one even looks you up for free in the online white pages to try and find you. The idea of measuring people's credit history is valid, but the present system of executing that idea is rather flawed. But it's perfectly profitable for the people running it, hence "Sorry, sir, there's nothing we can do." Hopefully in years to come the pendulum will swing a bit. Things like annualcreditreport dot com, MyFICO, and TrueCredit didn't even exist until recent years. At least now they exist, although the latter two ought to be less expensive. But the industry has a ways to go before they're treating people fairly.

You're right and maybe sometime soon, more people like us will react to this and eventually make the governmental legislative entities put a little more emphasis to the idea of 'equal credit opportunity'... Forcing banks to better implement the credit scoring idea. Since the implementation of these credit scoring models, the quality of services provided by creditors have greatly lowered and the response time has tripled up. It feels now like a dumb automated process that is very flawed in it's current ways of implementation and yet very fast to score you.

Credit history via SSN

The bad credit fixer would like to discuss the issue of credit history being generated by accounts assigned to social security numbers which in many instances are not correct or can be faudulent.

Social security numbers are public and can be obtained from any 1003 Residential Loan Application or purchasing leads from the credit bureaus. This practice has created the situation where millions of Americans find accounts which are not theirs on their credit reports.

In most circumstances these accounts create a negative credit history and it is very difficult if not impossible to get them removed. Instead of innocent until proven guilty, individuals are considered responsible for the accounts until they prove otherwise. This is ridiculous.

Purpose of a FICO score

I changed the "Purpose of a FICO score" section. Perhaps the whole section should be deleted because it isn't sourced. At any rate, the section was very badly written and wasn't even grammatically correct in many places. I kept the content roughly the same, I therefore don't necessarily endorse the content but it nonetheless it needed to be cleaned up and made more academic in tone. (I also the removed the dubious "qualification" of "New York Times Bestselling Author." The "Left Behind" authors are also "New York Times Bestselling Authors".

It looks like a "spin" was put on some information by an advocacy group, emphasizing their agenda while not mentioning any info that disagrees with it. I have read books by Suze Orman (The Road to Wealth; The Young, Fabulous, and Broke) and Dave Ramsey (The Total Money Makeover) to determine their positions.

Dave Ramsey does advocate the elimination of all debt, however he accepts a mortgage as a debt that does not have to be paid off until all other financial goals have been addressed, including funding your retirement — he even advises that a mortgage debt may be obtained if it is a 15-year mortgage whose payments do not exceed 25% of income (the same kind of mortgage that Suze Orman advocates). He also mentions that you must make sure that all info in your credit report is correct — if not, it must be corrected. Of course, Dave Ramsey cannot have a FICO score of 0 because the minimum FICO score is 300. The anonymous editor apparently thinks that 'no credit score' means a score of 0.

Suze Orman changed her mind regarding credit card debt. She originally thought that it was all bad, but within her "Young, Fabulous, and Broke" books she thinks that some may be necessary, providing that it is only used for necessary living expenses when you are just beginning your career. She also thinks that an auto loan is a good debt if you need a car to get to work — nothing fancy, just basic transportation.

At least one cell phone company (Sprint) does obtain your credit score in order to determine the amount of your deposit. If the score is good, no deposit is required. If it is bad, then a high deposit of $250 is required. If you do not have a credit score, like a young adult who has never applied for any credit, then they require a modest deposit of $100. Any deposit will be refunded (or at least credited to your account) in the bill for your 13th month if you have been paying that phone bill for at least 12 months.

Some large employers will perform a preliminary screen of a large pool of applicants by requesting their credit scores — a survey that I took asked my opinion of that practice. If the score is bad, they won't invite those applicants in for an interview; if good, then they may or may not invite them depending on other info, but thereafter it is never used again by that company to 'grade' that applicant.

Except for erroneously equating no credit score with a score of 0, there is no outright lie in the section, but it certainly doesn't have a neutral point of view. However, to provide the article with both points of view would necessarily require a large section that has precious little to do with a credit score. I cannot provide any published source for the phone deposit or applicant screening uses of a credit score, so they not make it into the article.

FICO score Part II

If I had a million dollars, I wouldn't need credit either. For the rest of us, credit is a powerful tool when it is used responsibly. If you own your home outright, be prepared to receive no financial aid when your child applies for college. And credit allows people with modest incomes (not millions) to maintain emergency savings while they make large purchases. You shouldn't have to scrape down to the last pennies in your checking account just to buy a car. And if you can get a credit card for free, pay no annual fee, and start building a good credit score, why not do it??

Anyway, this article isn't the place for a discussion like that. Maybe another article about credit in general could argue the benefits that leverage brings to consumers and the economy as a whole, vs. the exploitation, etc. But this is an encyclopedia entry about credit scores, not a forum for debate about credit.

I don't think you actually read Dave Ramsey's book. That or you do not get the point. He has a million dollars because he did not borrow money. If I have no house payment sending my kid to college is no problem. Borrowing money is by no means "saving" for an emergency. If you had read his book you would know that is the first thing Dave Ramsey tells you to do. SAVE for an emergency instead of relying on credit. I've never had to "scrape down" to my last pennies to purchase a car because I budget for it in the future. If you can afford the payment please explain to me why you cannot afford to save the same amount each month into savings? Of course credit cards are free because they are charging you 18%+ on any balance. Do you really think that the banking industry spends billions on advertising credit cards each year so you can use their "free money"? Everyone argues the "responsible use" of credit cards but apparently only 20% of card holders do it. Middle class people generally stay that way because most have been convinced the use of OPM (Other People's Money)is how you build wealth when ironically must end up middle class or retire poor. A lot of people need to wake up and realize that banks are NOT non profit organizations.

Well, I don't think any of this really relates to an article about a credit score. But I don't mind a discussion, so I will post my feelings on your talk page! Feel free to take a look and respond (or delete my comments if you'd rather not see them there).

FICO score of zero

I don't see a citation for the FICO score of zero for the financial adviser, but it is impossible. The minimum FICO score is 300.

The idea of "needing" a FICO score is also misinformed, since it is impossible to not have one, no one is in need of a score.

As far as cell phones, all major carriers require either credit checks or huge deposits. One company requested $10,000 from a friend of mine a few years back. I am not sure if they use a FICO score, but they do use some scoring system. If your score is poor you can still get a cell phone and service but often with lower spending limits and other restrictions.

If a cell phone company wants $10,000 for a deposit then your friend should find a cell phone company with a brain. I had a friend who claimed chapter 7 and 6 months later it only cost him a $400 deposit to get a phone. After 12 months the $400 was refunded to him. The only other time you would usually see a deposit that high EVER required is if you had a previous past due account with that company with a high balance.

The FICO score is a gimmick that the banks and the lending industry use to convince people that they should stay in constant debt to keep a good "credit rating" and it works very well to fuel the common practice among the middle and lower classes to buy what they cannot afford on payments. It's a artifical excuse people are given to continue buying what they cannot afford.

You do NOT need a FICO score to buy cars, homes, cell phones, get student loans, etc. The reason I know this is because that's how I live and I've never had a problem obtaining any of these before.

Credit card and derogatory statements

Question: Are you penalized if you use a credit card every month and pay it off every month even before you get the statement?

I was told I have derogatory statements on my credit report and trying to figure out if that is it or if the fact I have taken a year to payoff my hospital bill is it.

Answer: The easiest way to find derogatory statements is to get your credit report. The negative info is usually in a separate section. You can get all three of them for free at annualcreditreport dot com.

Also, if you've been turned down for credit, by law you should be given a copy of your credit report.

This isn't the best place to ask, but you won't normally be penalized for paying your credit card off every month. Negative things are usually 1) bankruptcies 2) judgments against you 3) collections 4) very late payments (> 60 days) 5) somewhat late payments (> 30 days) 6) requests for your credit report (this supposedly makes you look desperate). It might be *slightly* better to not pay the entire credit card balance each month. Like if you owe $100 and the minimum payment is $30, pay off $95 so your account still looks active, but really that is a very minor point.

Given what you've said, your hospital bill is probably the problem, but get your report(s) and find out for sure. If the hospital bill really is the issue you can sometimes get the negative item removed. If you've paid it already give the office a call and see what you can manage. If you haven’t paid them and have the funds to do so, see if you can make a deal where they remove the negative remark in exchange for payment.

If you are trying to get a home loan in the near future you may want to know your fico score before applying, but if you aren't trying to get a loan hold off on this because it costs a fair amount of money (~$45 for three scores).

So if leaving $5 on your account each month is better than paying off your entire balance, then what is the advantage of such cards as American Express charge cards where you are required to pay off your balance each month? These cards seem to be targeted towards wealthier folks whom the credit card company is not worried about making their payments. i am also trying to understand whether it is better to pay it all off or to leave a balance.

Building up a credit score from scratch

There are many credit scores around the world, one of which I am the author of. This blog is not the place to try and establish a single vendor as owner of a generic term. Also, just because an author thinks he knows how the formula works, this doesn't mean he actually knows how it works, nor should he publish guidance that suggests he has the answer.

Would anyone consider adding a paragraph "building up a credit score from scratch" ? This would be extremely useful for foreigners who intend to live in the US. Especially if you plan to stay just for some years e.g. visiting scientists, certain aspects of everyday life are really hard to cope with. Using a foreign credit card e.g. is more than inconvenient if you are a resident alien (and it's really expensive!)

I don't know a whole lot about it, I'll look around. If you're a foreign scientist you'd be a good candidate to start putting this together ;) The same basics apply (pay bills on time, etc) but there are probably some shortcuts given your standing as a bill-paying adult that can accelerate the process.

The biggest problem you'll have is a complete lack of credit history in the U.S. If you look here you'll find some (very old and possibly outdated) advice. The author claims it is possible to get credit references from other countries to try to help when attaining a card. In practice, I have no idea how you'd do this. To me, it seems that most banks are uncomfortable with making any type of credit decisions in a non-automated fashion. You might have an easier time finding a bank that can pull your foreign credit reports; I talked to National City and they told me they have the ability to pull Canadian credit reports, for example. Anyway, there are plenty of no-fee checking accounts in the U.S; if you're just looking for the convenience of having a plastic card, you could use a debit card, which will work anywhere a regular credit card would. These are free at all the major banks I know.