Thursday, February 5, 2009

Your Credit Rating

This is interesting - the formula that determines your the FICO score in your credit rating is being updated. See here for details, but the interesting ones to me are:

4. Having more available credit will increase your score more
6. Closing accounts will bring down the score.

These are simply saying the same thing, in some way.  If you reduce the amount of credit that you could use, then people will apparently be less willing to extend you new credit.

So if people are rationalizing their spending these days and trying to live within their means, wouldn't they close down unused credit accounts (if only to stop themselves from spending more).  And then their credit score will go down, meaning that they'll be less able to access credit and buy things like cars, houses, and major appliances.  Won't that make the recession worse?

One big problem with the FICO is that they have information only on your credit payments, not on your income. So it's not clear to a prospective lender whether your amount of credit is appropriate to your income or not.  They are basically hoping that because other people are willing to loan to you, you are a good credit risk.  But if this is how everyone operates, it seems like there is a really big potential coordination problem. (If no one lends you money, you can't get credit, even if you have a stable job and are really responsible.)


Petey Esdie said...

let me get this straight...

last year i asked my credit union to stop increasing my credit limit automatically and put a $5K cap on the card (in case it was stolen again, to minimize the potential damage).

under the new formula, i'm going to be punished for this move? ridiculous.

- David

Petey Esdie said...

one more thing:

baconize your site