Frank the Financially Savvy Atheist - The F.S.A.

Rich is ranting about FICO scores again. I actually agree with him, but wanted to play devil's advocate :P.

He rants about two things:
"1. The proportion of balances to credit limits on your revolving/charge accounts is too high" complaining that he's putting his 0% arbitrage money in safe investments. Well, as well all know, FICO doesn't see that he's putting the money in safe investments or his overall capacity to pay. It's just a regression that says, hey, when people are carrying higher balances on their credit lines relative to their total balance, they are more likely to default. Intuitively, that makes sense. Within a given large sample of people, those with higher balances relative to their total balance are going to be more likely to default because they are probably running up their credit lines as a last means of defense.

On to number two:
"2. The time since your most recent account opening is very recent."
This is most likely an artifact of the regression again. Here, the FICO people have a variable for age of account and noticed a strong correlation between the length of time an account has been open with % of default. Once again, it makes sense. If you've been making payments on time for 24 months straight, then you are more likely to keep making those payments.

So keep that in mind. A FICO score tells you the probability of default and does a fair job of rank ordering people by probability of default. So in a fairly large population of consumers, those with a higher FICO score will be less likely to default than those with a lower FICO score.