FICO and the Credit Bureau Cartel

I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings.

It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".

Pretty much, yeah. A credit score is a descriptor of the risk of financial loss when lending the individual concerned some money.

So the only real way to grow and keep the score high is:

* Pay your credit card and loan statements when they are due (late payments imply you don't have money).

* Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money).

* Don't max out your credit limits if possible (you're taking and maxing out lines of credit, implying you don't have money).

* Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money).

* Keep doing all of the above for many years (a good credit score implies you have money and will pay back debts incurred).

There's no magic or mystery to it, it just takes a lot of time to grow and keep high because you're building and maintaining trust with banks. You know that old saying? Trust is built over years but destroyed in a second? Yeah.

>Lack of money is only one of the possible reasons for those situations.

As far as a lender is concerned, if you don't pay back your debts you might as well not have money even if you actually do.

>Entities with tons of money seek loans all the time for liquidity and risk mitigation.

And each and every one of those inquiries will lower your credit score, because you're taking on more debt. Do you have money? Will you pay the debt back? The more inquiries there are (the more you ask for loans) in a given span of time, the less likely it is you have money and will pay debts back.

>Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially.

Banks hate seeing lines of credit maxed out. Ask any banker worth his salt and they will all tell you the same.

If it wasn't obvious already, banks don't like lending money. That might sound strange, but for a bank (the lender) a loan is an investment and investments are risks. The more loans (debt) someone has, the more risk they are carrying and thus their credit score will reflect that.

>What in tarnation.

A line of credit in good standing that has been open for a long time means you've been making your payments properly, meaning the risk of lending money to you is lower than someone who does not have a line of credit as old. Thus, your credit score will be higher.

The age of your credit is usually determined by your oldest open line(s) of credit. Closing an old line of credit means it will eventually fall off your credit report and stop being reflected in your credit score, which will fall to reflect the new and younger age of your credit.

Again: Everything about credit score is solely about the risk you might pose to a lender. Anything that increases that risk will lower the score, and vice versa, even if it's just an implication.

> banks don't like lending money

Not quite. If you're not lending money someone else has deposited, you're not a bank. Banks have to lend money. Problems arise when they lend too much or lend badly.

If we want to spitball, we don't really need banks. In the age of computers, the central bank could take on their ledger function without breaking a sweat. It could then contract out the lending and deposit functions separately.

The deposit function is trivial. All deposit institutions would be 100% trustworthy. They'd just basically be ATMs for your account at the Fed.

The lending function is slightly hairier. The Fed would set risk parameters and performance-based revenue sharing. The lenders would have one client to please, and would be barred from many of the shenanigans they do today. However, they'd have a rent-seeking incentive.

seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.