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Old 12-15-2017, 09:53 AM   #1
sundialsvcs
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The Credit-Score Catch-22 (And What One Man Did About It)


Sometimes you have very interesting lunchtime conversations, such as I recently had with a person who of course will remain anonymous. This (American) person makes six figures, has one credit-card to his name, owns his house – and, last year, couldn't get a loan anywhere. He pulled his own credit-report and found that it was "a number down in the dirt," even though there was virtually nothing on it. (After all, if you have one credit-card and no mortgage, you wouldn't expect much activity.)

"And this, as it turns out," was precisely the problem. Just like the advertisements that the Army used to run, "how can you get experience if you don't have experience," you can quite-literally find that "no one will give you a loan because no one will give you a loan." Even if you make over $100,000 a year, own your home, and owe next-to-nothing to anybody.

It is literally "catch-22" if you can't initiate the kind of credit-activity that the credit agencies are looking for (and rewarding), because of your "low score."

My friend's solution to the problem was simple and effective: he went to every bank in town (that would give him an account, because of his "poor credit rating"), and took out a $500-$1,000 loan backed by an equal amount of cash which he deposited (and which the bank subsequently locked). Then, he put that money into an investment account and used it to faithfully make timely payments on each of these loans. (He never spent any of the money for any other purpose, while his investment turned a small profit.)

Within six months, and having actually done nothing more than to move "money that he could spare" from one of his pockets to the other, he had turned his credit-history completely around. (As six months turned into twelve, the score began to improve even faster.)

"You just gamed the system, you know," I said to him with a smile. "No more than they'd gamed it against me," he replied with an even bigger smile. (And in fact, what he had done was perfectly legal ... just very clever.) "Just give 'em what they want to see," he said. "It won't cost you a cent." (Banks can't charge interest on a loan that is backed 100% by your money which they're holding in reserve, because they aren't taking any risk. They pay interest, since they're holding your money.)

Credit-agencies now legitimately saw what they are programmed to praise: that he had a many "secured loans" (they couldn't know what had secured them, and they didn't seem to care how big they were or weren't); that he held them for a year; and that he had paid them on time. That's all they saw, and that's all that mattered to their precious algorithms.

Suddenly, banks that wouldn't give him the time-of-day a year earlier were outrageously happy to see him, even though his actual financial position hadn't changed. Of course, they all wanted to sell him a big fat credit card. Shrewdly, he opened "unsecured lines of credit" instead, keeping all of them virtually empty. He's well on his way now to having one of those credit-scores that you think no one could have, while his actual financial position has changed almost none-at-all except for "credit availability."

If that's "gaming the system," it sounds like a great idea to me. (Serves 'em right.)

- - - - -
P.S.: If you do have some cash, "cash is also the perfect collateral" for other types of personal loans and/or credit instruments which some banks and credit-unions may offer. Because there is collateral, and because this form of collateral is by definition "perfectly-liquid and risk-free," interest rates (if any!) are a fraction of what they otherwise might be. A $1,000-cash collateral can back a $2,500 credit-line at 3.5% interest, with no interest until the amount borrowed exceeds the collateral, and then only on the difference. (But it will legitimately be reported as "loan activity.") Check it out. Businesses get these things all the time as "leverage loans" to help them "float" their inventory against (especially ...) seasonal purchases, but individuals can get them, too. I-f they ask. If they know to ask!

Just as it obviously pays to know how the credit-reporting algorithms work and so how to quite-legally bend them to your favor, it also pays very well to shop around for credit alternatives, and to consider possibilities beyond the very first thing that the credit-salesman has to sell. There are many less-expensive options out there that (of course ...) you won't be told about, unless you know to ask, simply because the bank makes much less profit on them. (Credit unions, which generally are not part of financial mega-corporations, are usually more receptive, and nearly all of them now allow anyone to be a "member." But even there, you still have to know to ask for more.)

Last edited by sundialsvcs; 12-15-2017 at 01:17 PM.
 
Old 12-15-2017, 01:11 PM   #2
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I ran into a similar issue when I wanted to buy a condo in 2009. My bank (who I'd been with for over 20 years) told me I didn't "have enough credit" so wouldn't talk to me about a mortgage even though I was putting down 20%. Another mortgage company said they could use my payment history on utilities as proof of credit and gave me the loan. For the past 5 years my original bank has the gall to send me things at least once a month suggesting I refinance with them.

Before the above I was down to one credit card. I'm now back up to three which I use on a rotating basis and pay off each month to avoid interest charges. Another benefit to using credit cards and paying them off as opposed to using debit cards is there is no direct access to your bank account as there is with debit cards.
 
Old 12-15-2017, 03:39 PM   #3
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The only thing that one credit-agency has ever said about their "algorithm" is that it breaks down like this:
  • (35%) "Timely Payment" – apparently the only thing that matters is the postmark-date on the envelope.
  • (30%) "Utilization" – that you have far more available-credit than you use.
  • (15%) "Duration" – how long a particular credit-account has been open.
  • (10%) "Credit Inquiries" – Yep, when you ask(!) for credit, or if anyone asks about your credit, it costs(!!) you.
  • (10%) Mix of types of credit instruments in-use.

I'm quite sure that my friend "multiplied the number of data-points by (say) ten," when he opened "(say) ten" credit-accounts, even though every single one of them was in fact "secured" by himself and that they had minimal amounts. Better to make timely-payments on "ten" accounts versus "one or two." And then, as the "(say) ten" credit-accounts were timely paid-down, utilization – expressed, as it is, as a percentage – also magically went down. (And, most likely, was "multiplied by ten.")

And thus, with 35+30+15=80% of the algorithm's inputs thus having been covered, and "10% being known-zero," and "who cares about the other 10%," it's very easy to see why my friend's credit-score rocketed fairly to the stratosphere. ("Known zero": they don't 'run your credit' if the loan is 100% backed by cash – unless you ask them to.)

"We computer programmers" basically "know the score behind 'the score.'" We know that "there is a Java (ick ...) program out there somewhere," to which various institutions have ceded the ability "to rule ruin your life," precisely so that they don't have to make decisions for themselves.

So that they can, as in this case, look at someone who "owes nothing to nobody," and who "takes home several thousand dollars cash every month that he doesn't have to spend," and yet tell him (at one time, but not less than one year later) that he was an "excessive credit risk" because of the return-value of that Java function his (sic) "reputation."

Hey, I'd be perfectly happy to help "debunk" the present credit-scoring (sic ...) system! If "community banks" were doing their job, as they once did, title-pawn loansharks (with their "several-thousand percent yet said-with-a-straight-face interest rates" ...) would not exist. I'd love to show that these supposedly all-knowing agencies are butt-naked, and that therefore financial institutions are irresponsible for relying upon their "single (unexplained) magic number" in the way that they now do.

Right now, I think that these institutions are turning away a great deal of perfectly-valid profits business! And, when they do make a loan based on "that number," I have no confidence that "that number" is a credible predictor of the risks that they're actually taking. To me, "that number" which they trust implicitly is not and cannot be trustworthy: there is no "security by obscurity," and anything can be added to a report without notification to or verification by the debtor. Such computational and business processes can't be reliable.

Last edited by sundialsvcs; 12-16-2017 at 08:32 AM.
 
Old 12-18-2017, 10:46 AM   #4
sundialsvcs
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Since mentioning that I had mentioned this, I have since learned that my friend's strategy was even more clever than I thought.

He took (say ...) $1,000 and used that to take out a $1,000 loan secured by $1,000. Since the loan was secured by cash, the bank didn't even run his credit.

Now, he took this $1,000 proceeds – he just got his own money back – and moved on to the next bank. In very short order, he had a series of "secured credit lines," each of course with slightly differing amounts, which all began to be favorably reported to credit agencies, all at the same time. (The acceleration in the "speed of improvement" that was observable about 6 months into the process was probably due to the "utilization" factor kicking in.)

And, mind you, it was all "100% legal." He never made a false representation to anyone at any time. There was never any question of his ability to repay. And it cost him very, very little, since the interest rates that a bank can charge on a loan secured by cash are extremely low to begin with. He easily had the income needed to pay each loan back, "monthly payment received 5 days early, each and every time." In so doing, he arranged thereby to give the hapless credit-reporting agencies algorithms exactly what they most wanted to see, simply by making ingenious use of surplus money he already had.

Since nothing but a computer is ever really involved in credit-decisionmaking anymore, he simply engineered to give their algorithms the inputs that they were looking for, and those blind algorithms in turn gave him the result he was looking for. Once the ball was good-and-rolling, he replaced them as previously mentioned with largely-unused lines of credit that the bankers were suddenly happy to give ...

... as they, of course, should have been all along, had any of them dared to make human decisions. ("Hundred-thousand-dollar-plus income and almost no debt? Duh. What's not to love?" Yeah, you would of-course assume that it was that way, but no.)

Today, and no matter what they say in their "we're just good ol' home-town boys" advertising, all bankers do exactly the same thing: they "run your credit score" and then they hold that magic-number up to a decision-table that has been pre-approved by their directors. That's it. The End.™ Not a single one of them will "go out on a limb" in any way. "That Number,™ wherever it came from," is the Voice of God Himself™. But a little bit of "GIGO Grease" can certainly ... and, entirely legally ... work to your good favor.

"Luv it ..."

Last edited by sundialsvcs; 12-18-2017 at 11:12 AM.
 
Old 12-20-2017, 10:30 AM   #5
moxieman99
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Quote:
Originally Posted by sundialsvcs View Post
It is literally "catch-22" if you can't initiate the kind of credit-activity that the credit agencies are looking for (and rewarding), because of your "low score."
It's the old saw about banks won't lend you money unless you can prove that you don't need the loan.

As for not being able to initiate credit activity, that problem went away with the advent of secured credit cards. Now you can, expensively, initiate the credit activity that the credit agencies look for. With a few exceptions, mainly due to medical expenses and health limitations, or economic forces beyond one's control, that affect one's finances (medical bankruptcy and inability to work, factory closures when over 40, some family care-giving situations, etc.), people with poor credit are people who were irresponsible in their prior use of credit.
 
Old 12-20-2017, 12:03 PM   #6
sundialsvcs
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Quote:
Originally Posted by moxieman99 View Post
With a few exceptions [...] people with poor credit are people who were irresponsible in their prior use of credit.
Actually, I don't think that's true anymore. Today in America, all you see anywhere are "title pawn" shops and other loan-sharks. Where do you suppose that those sharks get their money? Uh huh. The Glass-Steagall Act is no more.

Paradoxically, actually borrowing money from such places "makes your credit-score worse." Credit-reporting agencies don't bother to explain why this should be so. Some "secured credit cards" actually wind up the same way. (But bank loans don't. Don't ask me why.)

If banks were still doing their legendary (Glass-Steagall ...) duty, there would be no market opportunity for "loan sharks" to exist. Yet we plainly see that they exist everywhere – and that they prosper while their clients are financially destroyed. We see every day what Messrs. Glass and Steagall saw, back in the Great Depression, and what Messrs. Dodd and Frank purposely (sic) "forgot."

- - -

We shouldn't assume that credit-reporting agencies are in fact sources of objective truth. We should be skeptical enough to consider that their results might not be the objective litmus-test that they proclaim to be. They have a vested interest in "justifying" predatory lending behaviors. Everything that they do, they do in secret, using information that is never even checked for accuracy which is then compiled using algorithms that they won't disclose. Unfortunately, banks and other institutions then rely implicitly upon these "magic numbers," and nothing else.

Lenders rely upon this "magic number" as the ultimate source of truth, having abdicated their entire credit decision to it, but nobody's (yet) asking very hard questions about this. Exactly what risks are those banks actually taking? Do they know? Or, do they merely trust something that just might not be trustworthy?

- - -

In the case at bar, "any damned fool could see" that someone who makes six-figures and who basically doesn't owe anything to anybody simply cannot be "a bad credit risk." But, this is the situation that my friend faced, and I'm guessing that his experience has become quite typical.

Likewise, it ought to be comical to think that "what my friend subsequently – and, very successfully – did about it." But instead, I think that it's informative. (Quite scary, really.) He simply hit upon what the algorithms were looking for, and gave them what they wanted. Lenders who looked "only at the algorithm's results," and who quite-possibly had no choice but to do so, suddenly treated him quite differently when those magic-numbers ... and, mind you, nothing but(!) those magic-numbers ... changed. Yet, why on earth did such a person have to do this in the first place?

Last edited by sundialsvcs; 12-20-2017 at 12:05 PM.
 
Old 12-20-2017, 12:23 PM   #7
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Quote:
Originally Posted by sundialsvcs View Post
Paradoxically, actually borrowing money from such places "makes your credit-score worse." Credit-reporting agencies don't bother to explain why this should be so. Some "secured credit cards" actually wind up the same way. (But bank loans don't. Don't ask me why.)
I'm assuming it is because they figure anyone dumb enough to use title pawn loans is too dumb pay back unsecured credit. Such people would be far better off selling your car and riding the bus (or walking) than getting into that kind of trap.

Years ago the one and only time I pawned something the bastards offered less than 10% of what it was worth. I was in a crunch to pay rent before payday so took the lousy 10% but made it clear I'd be back to get the item. On payday I went and got it back and have never again set foot in one of those clip joints. (By the way I was too poor to own a car then so did walk 6 miles back and forth to work.)
 
Old 12-20-2017, 01:42 PM   #8
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Originally Posted by MensaWater View Post
I'm assuming it is because they figure anyone dumb enough to use title pawn loans is too dumb pay back unsecured credit. Such people would be far better off selling your car and riding the bus (or walking) than getting into that kind of trap.

Years ago the one and only time I pawned something the bastards offered less than 10% of what it was worth. I was in a crunch to pay rent before payday so took the lousy 10% but made it clear I'd be back to get the item. On payday I went and got it back and have never again set foot in one of those clip joints. (By the way I was too poor to own a car then so did walk 6 miles back and forth to work.)
"Don't assume!"

Didn't you stop to notice that, in the years since the Dodd-Frank Act repealed Glass-Steagall, "title-pawn shops and the like have exploded?"

Kindly remember that, now(!), "your familiar neighborhood bank" is actually an arm of a gigantic financial Hydra which now-freely combines "finance," "insurance," and "banking," precisely as the Glass-Steagall Act prohibited. Therefore, the "banking" arm is only a place where financial losses can be dumped, knowing that Uncle Sugar will cover everything. Otherwise, they are unprofitable, whereas things like "loan sharks" most-decidedly are not. Why on earth would these companies want to loan money at a paltry 6-11% interest, when they could extend the money to a loan-shark who takes thousands of percent interest, and "split it with him?"

This, unfortunately, is exactly what was happening in the years that led up to "1929," and Messrs. Glass and Steagall understood this. However, since then, Messrs. Dodd and Frank better-understood that the only thing that a Member of Congress really wants is ...

But, "here we are." A few hopeless souls are still "in the banking business," if only to keep up the pretenses. And, they're looking at a "magic number" that is being fed to them – and nothing more.

However: "this 'magic number' can very easily be ... legally ... manipulated." Therefore, I say, "go and do likewise."
 
  


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