April 1,2009
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PIF vs. FICO vs. Lowered limit, Pt.1
FICO's interesting findings.Is paying a credit card off every month always the best or is there right balance that's better? All of a sudden, that answer isn't so simple any more. The Fair Isaacs' Corp. (you know, the people who make the most trusted decisions for us all) just released results from a very extensive study (200 million credit card accounts) to see who got hammered with reduced limits and why. The scope of the study covered from April to October of 2008. Of those 200 million credit card accounts, 32 million of them (16%) had their limits reduced. Of course, Fair Isaac's main interest was how these reductions related to their national standardized FICO scoring system both, before and after.
We all think we already know the answer, don't we? People with worst scores took the worst pounding, both before and after. We would be wrong here, however. As it turns out, of the 32 million credit card accounts with slashed credit, more than twice as many ‘good standing' credit card accounts were whacked than ‘checkered accounts'.
Now, we're thinking that the result of the reductions destroyed everyone's FICO scores. Wrong again. It turns out that FICO scoring remained ‘relatively flat' for 90% of all cards that got whacked. There were some significant changes in the remaining 10%, however. Don't you suppose the FICO scores of those hapless 10% got hammered? Wrong, again. It turns out that, for every 2 credit card accounts that dove 40 FICO points or more, 3 others ones rose by 40 points or more. Nutz, isn't it? How do we make sense of it?
In statistics, we have a condition called ‘multi-colinearity'. When we're looking at what "A-condition' does to ‘C-condition' with ‘B-condition' as a factor, we have to ensure that ‘A-condition' and ‘B-condition' have a predictable relationship. "If I strike my finger with a hammer, will it hurt?" ‘A' is the blow from the hammer, ‘C' is the pain. "If I strike even harder, will it hurt even more?". How much force, is the ‘B' condition. Simple, right? How about with credit cards?