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Follow up to Yesterday’s FICO Question
By JLP | May 7, 2008
Yesterday’s Question of the Day was about good debt/bad debt and FICO scores. I want to concentrate on the FICO part of the question:
Many FICO scores are based on DTI, or Debt-to-Income ratios. DTI generally doesn’t include debt to own a home, even if the loan was sub-prime. Is this a mistake? Are FICO scores even trustworthy?
I didn’t know the answer to this reader’s questions so I asked a friend to contact Liz Pulliam Weston, an MSN Money columnist and author of Easy Money
Actually, FICO scores, like most other credit scores, don’t take income into account at all. The factors used include payment history, debt-to-credit-limit (also known as credit utilization), length of credit history, most recent credit requests and mix of credit types.
Credit scores are designed to predict your risk of default based on how you’ve handled credit in the past. Lenders are supposed to use scores along with other measures, such as figuring out whether your payment will eat up “too much” of your income (that’s a subjective measure that varies by lender), the stability of your income, the value of what you’re buying and how much of your own skin (equity/down payment) you have in the game.
At the height of the subprime insanity, lenders were abandoning those other measures…and sometimes not requiring much in the way of credit scores, either.
Are FICO scores perfect? No way. But the lenders who are pushing all the blame on the scores are being pretty hypocritical about their own roles in creating this mess.
Liz Pulliam Weston
So there you have it. I appreciate Liz taking the time to respond. Hopefully it answered the reader’s question.
Topics: Credit |
May 7th, 2008 at 1:30 am
I’m a little confused, but perhaps I’m just reading it incorrectly. Liz states in the very first sentence that FICOs don’t take income into account “at all.” But then she goes on to say that it DOES take into account, “whether your payment will eat up “too much” of your income [and] the stability of your income…”
Doesn’t the second part completely contradict the first? Income is a factor from the way I interpreted what Liz had to say. Perhaps they don’t look at the exact numeric amount, but income does affect your score to an extent. That seems to be quite a bit more than “not at all.”
May 7th, 2008 at 8:43 am
@ Ellen - lenders take the FICO score and DTI into consideration when determining credit worthiness. FICO does’t use your DTI, lenders do. See my comment in yesterday’s post for more detail.
May 10th, 2008 at 12:43 pm
Re: DTI versus Debt-to-Credit
I stand corrected.
Yours,
Bozo