somebody help this cracker out!!!

[catamount man]

Banks are awefully tight with money right now. Businesses rely on credit and they aint getting it like they used to. Need to figure out a way to get credit flowing so businesses can hire.

One of the biggest challenges facing lenders (I won't single out banks here, because it's affecting Credit Unions as well) is the fact that there has been a paradigm shift in underwriting and lenders are having a hard time reconciling what they USED to do with what they NEED to do going forward. This impasse is what's leading to a lot of the "tight with money" issues in the banking world.

Since the invention of the FICO score, it's been possible (in CONSUMER lending) to predict a person's propensity to repay a loan within a quantifiable margin of error based on that score. For example, if a person had a FICO of 750, you knew there was a 99.7% (+/- .1%) chance they'd repay that loan, and you could price it accordingly. Similarly, with a FICO of 650, you knew there was a 98.5% (+/- .2%) they'd repay THAT loan and could price it accordingly. When the **** hit the fan back in mid-2007, those norms went right out the window. People with FICO's in the 800's were lining up to turn in their vehicles (many hadn't even had a LATE fee yet), and people with FICO's in the 700's were walking away from houses (now a depreciating asset) at record levels. The model we've used for 25 years blew UP in the span of 6 months and everybody went spiraling off into space.

Bottom line: lenders can not use the same consumer underwriting guidelines that they've used for 25 years and many are struggling to figure out how to determine if someone will pay a loan back, how to price that loan in this brave new world of consumer lending, etc., etc. This paradigm shift has caused something akin to gridlock in the "credit" world.

Similarly, on the COMMERCIAL side, the saying is "if the cash don't flow, the loan don't go", meaning that if the business doesn't have the Debt Service Coverage (aka "cash flow") to be able to cover their existing bills AND the new loan request, the loan is denied. And many business, running at a loss as they try to stay afloat, simply do NOT have the DSC required to qualify for new "credit". It's a viscious cycle to be sure, and not one that lenders necessarily have the answer to. We need to lend to get the "economy" flowing again, but without assurances that the loan will be paid back, many lenders are simply battening down the hatches and attempting to ride out the storm.

Correct me if I'm wrong AZ, but I've heard FICO is basically something the banks and government threw out there and that it can actually harm a person's credit report more than help it. For example, I've been told because I don't owe anything on a credit card, my score gets brought down?! How the hell is that possible. For me, not having that credit card debt to begin with should make me a credible borrower shouldn't it?

In predatory lending, and that's what I will call it from now on, it's not "finance", some companies never look at credit scores, just look at how they've paid their other creditors and if it's good, they make the loan. Sometimes, they've made it to bad credit folks which I never understood. Only greed made that call. So GLAD to be out of it. Thanks!

[danefan]

One of the biggest challenges facing lenders (I won't single out banks here, because it's affecting Credit Unions as well) is the fact that there has been a paradigm shift in underwriting and lenders are having a hard time reconciling what they USED to do with what they NEED to do going forward. This impasse is what's leading to a lot of the "tight with money" issues in the banking world.

Since the invention of the FICO score, it's been possible (in CONSUMER lending) to predict a person's propensity to repay a loan within a quantifiable margin of error based on that score. For example, if a person had a FICO of 750, you knew there was a 99.7% (+/- .1%) chance they'd repay that loan, and you could price it accordingly. Similarly, with a FICO of 650, you knew there was a 98.5% (+/- .2%) they'd repay THAT loan and could price it accordingly. When the **** hit the fan back in mid-2007, those norms went right out the window. People with FICO's in the 800's were lining up to turn in their vehicles (many hadn't even had a LATE fee yet), and people with FICO's in the 700's were walking away from houses (now a depreciating asset) at record levels. The model we've used for 25 years blew UP in the span of 6 months and everybody went spiraling off into space.

Bottom line: lenders can not use the same consumer underwriting guidelines that they've used for 25 years and many are struggling to figure out how to determine if someone will pay a loan back, how to price that loan in this brave new world of consumer lending, etc., etc. This paradigm shift has caused something akin to gridlock in the "credit" world.

Similarly, on the COMMERCIAL side, the saying is "if the cash don't flow, the loan don't go", meaning that if the business doesn't have the Debt Service Coverage (aka "cash flow") to be able to cover their existing bills AND the new loan request, the loan is denied. And many business, running at a loss as they try to stay afloat, simply do NOT have the DSC required to qualify for new "credit". It's a viscious cycle to be sure, and not one that lenders necessarily have the answer to. We need to lend to get the "economy" flowing again, but without assurances that the loan will be paid back, many lenders are simply battening down the hatches and attempting to ride out the storm.

Correct me if I'm wrong AZ, but I've heard FICO is basically something the banks and government threw out there and that it can actually harm a person's credit report more than help it. For example, I've been told because I don't owe anything on a credit card, my score gets brought down?! How the hell is that possible. For me, not having that credit card debt to begin with should make me a credible borrower shouldn't it?

In predatory lending, and that's what I will call it from now on, it's not "finance", some companies never look at credit scores, just look at how they've paid their other creditors and if it's good, they make the loan. Sometimes, they've made it to bad credit folks which I never understood. Only greed made that call. So GLAD to be out of it. Thanks!

The way I understand it is your credit score goes down when you don't have a loan balance, etc., not because you are now more likely to not pay off a debt, but instead because your ability to pay it off becomes more of a mystery. The lender no longer has something to hang its hat on. Does that make sense?

BTW, I run into this problem as well (no credit card debt, paid off student loans and my mortgage early and yet my credit score went down).

[slycat]

Same problem. I've always been able to pay off my credit card every month and I've paid off my student loans. Made it tough to get approved for a loan for my car. But in the end I got a great rate.

But I'll end up paying my car off early so that won;t help much either.

[AZGrizFan]

Correct me if I'm wrong AZ, but I've heard FICO is basically something the banks and government threw out there and that it can actually harm a person's credit report more than help it. For example, I've been told because I don't owe anything on a credit card, my score gets brought down?! How the hell is that possible. For me, not having that credit card debt to begin with should make me a credible borrower shouldn't it?

In predatory lending, and that's what I will call it from now on, it's not "finance", some companies never look at credit scores, just look at how they've paid their other creditors and if it's good, they make the loan. Sometimes, they've made it to bad credit folks which I never understood. Only greed made that call. So GLAD to be out of it. Thanks!

One element of your FICO score is the ratio of Credit Balances/Available Credit. Typically, the lower that number the better. Although they don't like to tell you what the FICO is made up of, there are several actions that will harm (lower) your score, even though it seems odd. Your example is one of those actions. You'd be better off either carrying a small balance or charging a small balance and paying it off each month. Another action that lowers your score is closing unused credit lines, as it adversely affects the ratio described above. And while your predatory lenders may not be looking at the actual SCORE, they are using the main element of the FICO score in their decision-making process.

[AZGrizFan]

I hardly ever say this but...nice work AZ.

+2.


I've been trying to put this issue into words for my wife for a while, but my mind hasn't been able to materialize it. I'm just going to email your explanation AZ.

You're welcome. My bill is in the mail.

[AZGrizFan]

The way I understand it is your credit score goes down when you don't have a loan balance, etc., not because you are now more likely to not pay off a debt, but instead because your ability to pay it off becomes more of a mystery. The lender no longer has something to hang its hat on. Does that make sense?

BTW, I run into this problem as well (no credit card debt, paid off student loans and my mortgage early and yet my credit score went down).

You are exactly correct. Having no "current" credit on your report does does cause your score to go down. Again, another example of what seems like an odd thing to have happen, but DF's explanation is exactly correct.

[D1B]

Yes, good stuff Z. Thanks.

[AZGrizFan]

Yes, good stuff Z. Thanks.

Your bill's in the mail too. I charge UNI fans double.