A credit forum has back-engineered chunks of the scoring algorithm via experiments run by members.
Your fico score is sensitive to net credit usage (quite reasonable), but also very sensitive to the usage on any individual card. eg Say you have a fico score around 800, $100k in total credit, and are using $1-2k for transactional spending that month. However, you still have an old credit card with a limit of $300, on which you charge $151. Maybe it's a gas card. Now you have an individual card reporting more than 50% utilization (but still a trivial amount of usage compared to your income and net credit.) Your score will take a 60 plus point hit.
You will also take a hit if you don't have an installment loan. Hence people find banks that allow you to prepay loans, take out $2k loans, then prepay them down to the minimum balance the bank will allow; say $1/month for the next 59 months. This can also bump your score 20-40 points.
Things like this, and their long fight against disclosing fico scores (and in particular, all your fico scores -- you have at least three relevant fico scores per credit reporting agency: the old 04-ish versions used for mortgages; fico08, commonly used for credit cards; and car ficos) can have enormous impacts on eg the cost of a mortgage. Fico is an ugly combination of stupid and/or evil.
This whole post is incorrect. I have been monitoring (really micromanaging) my credit closely for ~5+ years and none of which you say is accurate in my experience and your numbers sound completely made up.
60 plus point hit from someone otherwise creditworthy? No, just no. I had ~$120,000 in revolving credit. I opened up a new card with an $8,000 limit and maxed it out so 99% utilization hit my report on one card. My credit score only dropped about 20-30 points and it mostly recovered in about 3 months even though I was only been paying the minimum 1% balance. (I was riding the interest free period).
Don't think your $300 limit example is very realistic. Credit limits are only ~$300 on customers without a credit history or one with poor credit. Companies typically will automatically up the credit limit as high risk customers become more creditworthy. Nobody with $100,000 in revolving credit has such a low credit limit on an individual card (and even if they did, it would be as simple as asking for an increase, as a $300 credit limit on a card you plan on actually using is totally infeasible)
Old versions of FICO are not typically used for mortgages, don't know where you got that "information" from. I got a mortgage last year and FICO 8 was used. I got 3 quotes and all lenders used FICO 8. (this information was disclosed to me)
I didn't have any installment loans for many years and I was not penalized. My FICO 8 score was 750+ every single month for years with only two credit cards as my history. As long as you have a strong credit history installment loans mean nothing over revolving accounts. Maybe you'll get a 20-40 point increase from opening a new installment account, but that would likely come with opening up a new revolving account as well. Furthermore, everything I've read about FICO 8 says closed accounts count the same as open accounts for FICO 8 so taking out a loan and paying it off the next day counts the same as taking out a loan and paying it off over several years.
FICO is neither stupid or evil, its totally rational from the lender's perspective. I'm trusting there was some actual number crunching that went into these algorithms. Lenders, landlords, and insurance companies wouldn't use it if it wasn't working for them. Is it unfair to some populations? Yes, I don't think that is disputed, HOWEVER, it's "obvious" from a layman's perspective that someone who has used credit wisely is less risk then someone whose never used credit. The unintended side effect is punishing people who don't have a use for credit. Credit cards are becoming more important though for everyday life, I once saw someone get turned away from renting a car because he only had a debit card and no credit card.
Googling will get you dozens more. Maybe you found one fico8 lender; good for you. More likely, you have no idea at all what you're talking about. Further, experiments mentioned above (you can find on creditboards or r/churning) were replicated across many people, not just one.
I don't have any idea what I am talking about? Every single pre-approval I got (3 different companies) sent me a dead tree paper disclosure in the snail mail that showed all 3 of my credit scores for each credit bureau, when they were pulled (month/year) and the algorithm used to calculate them (it was FICO 8 - I pay attention to these things). Perhaps they use a different score when actually underwriting but my pre-approvals used FICO 8.
Yes, there's plenty of people giving misinformation on the internet. You're giving very specific numbers out of thin air that are ridiculously inaccurate from my personal experience.
(BTW, there's a back door way to get your credit report as many times a year as you'd like rather than just annually)
Credit scores are loose proxies for a conscientiousness score (which is why they correlate with all sorts of useful stuff like likelihood you're going to wreck an apartment, get in a motorcycle accident, or abscond with the till). However there is ample psychological research indicating that you can locally boost conscientiousness with a variety of techniques, mostly involving continual follow up, breaking compliance into small steps, and reminding of the benefits of compliance via frequent positive reinforcement. (It's fair then to ask if this really counts as "conscientiousness" per se given that level of intervention, or a more abstract measure of task completion).
It seems like this fund is using this to its profit. Good for them. It does almost seem, given that level of investment in the actual enterprise, like equity or some sort of hybrid instrument better represents the risk of the investor & the amount of effort they're putting into seeing the ventures succeed.
(Incidentally, this pretty solidly mirrors the approach to high-risk students of basically saturating them with life coaching, which seems to work pretty well as long as you can actually invest that level of resources continuously).
this is silicon valley. Every investor you meet tries to give you advice on how to run your company and live your life, even if 99% aren't going to invest in you.
I understand the sentiment. But if you had a low score due to poor financial management, you'd be better off getting some education with your loan than not getting a loan at all.
That said, these are small business loans, which is an area where advise would presumably be a lot more welcome than on a mortgage.
They're reinventing community banking. In small towns the bankers knew you, knew your family and made judgments on character and less on credit score.
Kids were borrowing for 4H animals, buying their first car, planting a field using dad's tools and paying those loans back promptly. All of that has gone away, but is being rediscovered.
Community banking is important but cannot replace how modern banks work. Loan volumes are usually small as you cannot give a loan of several million dollars just because you think the other person is trustworthy. Also, this system works for people who stay in their hometown but can make it hard for newcomers to get credit. If you're new in town and your neighbours don't like you it doesn't mean you should be denied credit.
FICO scores are far from perfect but it's the best system banks could come up with so far. All large banks are in the business to make money. If someone comes with better risk measures that can increase lending and keep risk low, they'd happily adapt it.
The big problem with replacing FICO is that new methods based on machine learning often exhibit some form of racial bias which can cause huge fines by the CFPB. So banks try to avoid any new techniques until they can be certain that the system doesn't bias towards certain groups.
More properly, they hand picked 40 businesses that later came out as being successful/capable of repaying the loan.
We don't have data to know if 40, 400 or 4000 businesses applied and then only 40 were financed or if all the 40 that applied were successful.
In other words, one may be reliable even if he/she has a bad credit record (along the established though most probably unfair current ratings), but the fact that these ratings are flawed doesn't mean that everyone with a bad credit record is reliable.
It is likely that there is a "gray zone" of people that do not satisfy the criteria of the current system credit ratings while still being good re-payers.
All in all this seems a lot more similar to VC funding than to "traditional" credit.
What was the underwriting criteria? What percentage of the loan applications got accepted? It looks they were looking to back entrepreneurs of color, but the criteria beyond that look unclear. Were there specific criteria, or was it just at the whim of the loan officer?
"A lot of this is just putting numbers into some sort of algorithm, and if you're above you're good to go, and if you're below you're not," Heredia-Lopez said.
"
Does not seem like an astute understanding of credit risk. I would not be confident in the sustainability of this initiative.
These are all new loans (they have only been issuing them for less than 2 years). I don't think we can conclude anything about those loans until they are actually paid down significantly.
Also this isn't really lending as much as it is financial accounting assistance. It's more or less similar to hiring an accounting professional who also brings capital. It sounds like they are additionally helping with management of the business as well. It's obvious that businesses that receive this sort of assistance are going to do fairly well, especially because we can presume their business plans were screened for viability beforehand. It's my very unscientific opinion that businesses usually fail due to either a non-viable business plan or mismanagement (and they often go hand-in-hand).
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[ 2.6 ms ] story [ 61.5 ms ] threadYour fico score is sensitive to net credit usage (quite reasonable), but also very sensitive to the usage on any individual card. eg Say you have a fico score around 800, $100k in total credit, and are using $1-2k for transactional spending that month. However, you still have an old credit card with a limit of $300, on which you charge $151. Maybe it's a gas card. Now you have an individual card reporting more than 50% utilization (but still a trivial amount of usage compared to your income and net credit.) Your score will take a 60 plus point hit.
You will also take a hit if you don't have an installment loan. Hence people find banks that allow you to prepay loans, take out $2k loans, then prepay them down to the minimum balance the bank will allow; say $1/month for the next 59 months. This can also bump your score 20-40 points.
Things like this, and their long fight against disclosing fico scores (and in particular, all your fico scores -- you have at least three relevant fico scores per credit reporting agency: the old 04-ish versions used for mortgages; fico08, commonly used for credit cards; and car ficos) can have enormous impacts on eg the cost of a mortgage. Fico is an ugly combination of stupid and/or evil.
60 plus point hit from someone otherwise creditworthy? No, just no. I had ~$120,000 in revolving credit. I opened up a new card with an $8,000 limit and maxed it out so 99% utilization hit my report on one card. My credit score only dropped about 20-30 points and it mostly recovered in about 3 months even though I was only been paying the minimum 1% balance. (I was riding the interest free period).
Don't think your $300 limit example is very realistic. Credit limits are only ~$300 on customers without a credit history or one with poor credit. Companies typically will automatically up the credit limit as high risk customers become more creditworthy. Nobody with $100,000 in revolving credit has such a low credit limit on an individual card (and even if they did, it would be as simple as asking for an increase, as a $300 credit limit on a card you plan on actually using is totally infeasible)
Old versions of FICO are not typically used for mortgages, don't know where you got that "information" from. I got a mortgage last year and FICO 8 was used. I got 3 quotes and all lenders used FICO 8. (this information was disclosed to me)
I didn't have any installment loans for many years and I was not penalized. My FICO 8 score was 750+ every single month for years with only two credit cards as my history. As long as you have a strong credit history installment loans mean nothing over revolving accounts. Maybe you'll get a 20-40 point increase from opening a new installment account, but that would likely come with opening up a new revolving account as well. Furthermore, everything I've read about FICO 8 says closed accounts count the same as open accounts for FICO 8 so taking out a loan and paying it off the next day counts the same as taking out a loan and paying it off over several years.
FICO is neither stupid or evil, its totally rational from the lender's perspective. I'm trusting there was some actual number crunching that went into these algorithms. Lenders, landlords, and insurance companies wouldn't use it if it wasn't working for them. Is it unfair to some populations? Yes, I don't think that is disputed, HOWEVER, it's "obvious" from a layman's perspective that someone who has used credit wisely is less risk then someone whose never used credit. The unintended side effect is punishing people who don't have a use for credit. Credit cards are becoming more important though for everyday life, I once saw someone get turned away from renting a car because he only had a debit card and no credit card.
Googling will get you dozens more. Maybe you found one fico8 lender; good for you. More likely, you have no idea at all what you're talking about. Further, experiments mentioned above (you can find on creditboards or r/churning) were replicated across many people, not just one.
Yes, there's plenty of people giving misinformation on the internet. You're giving very specific numbers out of thin air that are ridiculously inaccurate from my personal experience.
(BTW, there's a back door way to get your credit report as many times a year as you'd like rather than just annually)
It seems like this fund is using this to its profit. Good for them. It does almost seem, given that level of investment in the actual enterprise, like equity or some sort of hybrid instrument better represents the risk of the investor & the amount of effort they're putting into seeing the ventures succeed.
(Incidentally, this pretty solidly mirrors the approach to high-risk students of basically saturating them with life coaching, which seems to work pretty well as long as you can actually invest that level of resources continuously).
So they've rediscovered "knowing and helping your customers", instead of just seeing them as a number spit out by a computer. Awesome!
Investors/advisors with free advice are abundant.
Just remember it's worth what you paid for it 99% of the time.
That said, these are small business loans, which is an area where advise would presumably be a lot more welcome than on a mortgage.
Kids were borrowing for 4H animals, buying their first car, planting a field using dad's tools and paying those loans back promptly. All of that has gone away, but is being rediscovered.
FICO scores are far from perfect but it's the best system banks could come up with so far. All large banks are in the business to make money. If someone comes with better risk measures that can increase lending and keep risk low, they'd happily adapt it.
The big problem with replacing FICO is that new methods based on machine learning often exhibit some form of racial bias which can cause huge fines by the CFPB. So banks try to avoid any new techniques until they can be certain that the system doesn't bias towards certain groups.
1. New strategy grows success in communities
2. Support scales to meet new demand as it's taken nationally
3. Success occurs but margins are narrowed
4. Return to lowest common denominator support to grow margins for the near term
We don't have data to know if 40, 400 or 4000 businesses applied and then only 40 were financed or if all the 40 that applied were successful.
In other words, one may be reliable even if he/she has a bad credit record (along the established though most probably unfair current ratings), but the fact that these ratings are flawed doesn't mean that everyone with a bad credit record is reliable.
It is likely that there is a "gray zone" of people that do not satisfy the criteria of the current system credit ratings while still being good re-payers.
All in all this seems a lot more similar to VC funding than to "traditional" credit.
"
"A lot of this is just putting numbers into some sort of algorithm, and if you're above you're good to go, and if you're below you're not," Heredia-Lopez said.
"
Does not seem like an astute understanding of credit risk. I would not be confident in the sustainability of this initiative.
I don't have the life experience to comment on this, but my intuition says "business is business". Is that true? No matter the credit score?
These are all new loans (they have only been issuing them for less than 2 years). I don't think we can conclude anything about those loans until they are actually paid down significantly.
Also this isn't really lending as much as it is financial accounting assistance. It's more or less similar to hiring an accounting professional who also brings capital. It sounds like they are additionally helping with management of the business as well. It's obvious that businesses that receive this sort of assistance are going to do fairly well, especially because we can presume their business plans were screened for viability beforehand. It's my very unscientific opinion that businesses usually fail due to either a non-viable business plan or mismanagement (and they often go hand-in-hand).