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hegemony

Inflated credit scores leave investors in the dark on real risks

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Those who fail to learn from history are doomed to repeat it.

 

This current "Recovery/Period of economic growth" since the last recession is getting pretty long in the tooth, (and far longer than the 7 year delinquency reporting period of FICO risk models).

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If a lender is making decisions based solely on a three-digit score that is easily manipulated, then they DESERVE to crash and burn.  There is a LOT more to competent underwriting and pricing of risk than that score, which is why the more successful companies take the time to look at other data...

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This "score inflation" is an intrinsic property of the business cycle which is getting a bit long in the tooth. It's exacerbated by the legal requirements that exclude most all negative info after 7 years. Since most negatives from the Great Recession preceded 2012, those are all gone from reports and hence scoring. Quite impossible for FICO scores to factor in that which is excluded by law.

 

There is nothing new in this article except there is increasing awareness of the different risk environment.

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I expect that most large credit issuers are well aware of the tendency for delinquencies to increase when the economy sours.  And I don't think that invalidates score models, or renders scores meaningless.

 

See:  https://www.bankrate.com/personal-finance/credit/average-fico-credit-score/

 

The article cites an average score increase from 686 to 704 between 2009 and 2018.  Yeah, that suggest that more people are likely to qualify for prime/near-prime credit now.  But it's not like someone who had sub-600 scores is now scoring at 760+ unless more than just an improved economy has changed their credit behavior.

 

My point is that, at most, there's a modest backstory creditors should be mindful of.   But their own underwriting practices are the lion share of this picture.

 

 

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