"Daniel T." <daniel_t@[EMAIL PROTECTED]
> writes:
> I think that since FICO has come up, it is wise to point out that a
> higher FICO is not necessarily a sign of fiscal responsibility.
FICO is not a measure of how well you manage your wealth.
It's a measure of how well you've managed your debt *payments*.
There may be some overlap, in that those who are good at one
are likely to be good at the other. But overall, these are
separate concepts.
Lenders don't care how well you manage your wealth, nor how
fast it grows. They care about you paying them back on
schedule.
> For example:
>
> Five years ago, Bert and Ernie were in the same situation financially
> then Bert took out a loan and bought a $30K automobile, while Ernie
> unloaded some of his low performing investments to by his $30K
> automobile. As a consequence, today Ernie has a higher net worth than
> Bert and I expect that most, if not all, would agree that Ernie was the
> more responsible of the two, yet according to myfico.com &al, Bert ends
> up with a higher FICO.
I wouldn't speak for "most, if not all". How did Bert's remaining
investments perform over the period of his loan? What rate did he
get? If his car loan was at, say, 5% and his ****tfolio continued
to average, say, 10%, Bert's not only got a better FICO score than
Ernie, but he's also got more wealth. He took more risk to get
there - but that's yet another axis on which to measure all of
this, not an indictment one way or another. Of course, if he
left all his investments in something which tanked, and his
interest rate was 10%, he comes out looking pretty bad, but
that's the nature of risk.
> Example 2:
>
> Carrie and Dolly are in nearly the same situation financially, they both
> have 4 credit cards with interest rates of 10%, 15%, 18% and 20% and a
> $10K limit on each card, also they both have $8K in debt. However,
> Carrie has all of her debt on the card with 10% interest, while Dolly
> has her debt distributed, $2K per card. Again, Carrie is in the superior
> situation, she pays much less in interest every month. However, Dolly
> gets the higher FICO.
Does she? We know that FICO measures overall debt/credit ratio -
in the aggregate - in which case they're identical. Carrie hasn't
used 100% of any of her lines of credit, as far as we know, she's
not been late making any payments it nor violated that line's
limits. Are you certain that their credit scores will be
substantially different?
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