Are You FICO-Kidding Me?

The ads are all over the tv & radio… Whenever they’re not advertising certified diamonds or 4-hour erection medication there’s a hyped-up man on the verge of a tizzy offering you a “free credit report”, “check your credit score”, “know your FICO” – so I have to ask…

What the F*&# is a FICO?

The FICO Score is a ubiquitously referenced rating of your creditworthiness. It is generated by the Fair Issac Corporation (NYSE:FICO) a data analytics company out of San Jose, CA. Founded by Bill Fair and Earl Isaac in 1956, FICO generated revenue of $881M in 2016 with a profit of over $618M. The credit business is obviously booming, and churning out FICO scores is quite lucrative.

FICO controls over 90% of the credit scoring market and they are insanely profitable. They make their money from fees charged to banks, credit card companies, car dealers and other lenders who pay to check your FICO Score. With a profit margin of over 70% and a virtual “monopoly” on its industry, FICO has gone from $38.50/share in 2012 to around $135.00/share today.

Screen Shot 2017-05-17 at 6.34.08 AMFICO and VISA over the past 10 years, with Warren Buffett’s little ol’ BRK.B thrown in as a comparison. What’s in your wallet?

FICO has a nice, rich market to tap into. According to figures from the Federal Reserve in Jan. 2017, total U.S. outstanding consumer debt was a staggering $3.62 trillion in the form of car loans, student loans and revolving debt. Add in mortgages and you push up over $12 trillion in debt. The most recent reporting shows US household debt is at record highs, eclipsing the previous record level set in 2008 before we ran this thing off the rails and into the ditch. Buckle up…

With our government $20T in debt and our populace $12T debt, do you ever get to the point of wondering what anything is really worth anymore? Does anyone really own anything at all? To put this level of debt in perspective, consider that as of April 5, 2017 there was only $1.54 trillion worth of US currency in circulation, and $1.49 trillion of that was in Federal Reserve notes. We don’t even have the money in circulation to pay for all this crap! Things are getting fico-riduclous!

Whoo
WHOOO! – art by Ralph Steadman © used while awaiting permission

Decoding FICO:

Your FICO Score is number created by a byzantine process involving the 3 credit reporting agencies, Experian, TransUnion, and Equifax, combined with a secretive analytic formula run by the FICO computers. It is a composite look at your use of credit in your overall life plan: your payment history (do you pay your bills, and pay them on time), your utilization of credit (do you use credit often or do your credit cards lie dormant), your credit age (how long do you carry debt or how long have you been in debt), different types of credit (do you like to run up a plethora of credit cards, store cards, car loans, mortgages, home equity loans, student loans, etc.), and the number of inquiries into your credit worthiness (are you applying for more credit or doing things that lead to people checking your credit).

It’s important to note that the FICO Score does not take into account your bank balances or your net worth in any way, shape, or form. Odd. If you get a new job that increases your salary 10 times over, or if you suddenly inherit $2,000,000 from your long-lost Uncle Charlie, your FICO Score will not change.

In practical terms the score rates your ability to take on debt, and scores range from 300 to 850 in an attempt to gauge your creditworthiness so lenders can determine how much to lend you and at what interest rate – evaluating your risk level as their “customer”. The higher you score the more likely you are to get a loan and the lower you’ll pay in interest. “Excellent” scores rank 750 and higher, “good” rank 700-749, “fair” rank 650-699, “poor” rank 550-649, and “bad” rank 549 and lower.

fico scorecard
Here’s how they lay it out at www.cafecredit.com

Interestingly enough, 54% of all consumers rank 700 or higher so I suppose the overall ability of the average American to take on more debt is “good to excellent”, which is why we see that $12T figure today. One final note, once you enter the credit score game, you’re in for the long haul. It can take up to 7 years to join the “A-Team” and establish a FICO Score over 750.

Success?

A FICO Score is a bit of a perverse metric for someone like myself who truly believes that the debtor is a slave to the lender. Scoring your ability to take on more debt makes the debt you take on a merit and those with the highest credit scores are held up to be the more meritorious members of society. Many folks rate their “financial success” by a high FICO Score, but all a high score means is they are good at juggling debt and their ability to do so is reflected by more points on the FICO scoreboard. Scoring more points as a result of continually funding a lifestyle you cannot afford with expensive credit is not meritorious in my book at all.

FICO Strategies:

If you start talking to folks about credit scores, and start researching them online, you’ll quickly get into very some bizarre strategies in how to establish and/or raise your score:

One pundit recommends getting 4 credit cards, each with a $25,000 limit. He suggests putting 3 of them in a drawer, and then using one for *everything* in your budget, paying it off monthly. What in the hell? This is fico-stupid.

Another brainchild idea is called a “credit builder loan” or a “starter loan” – your bank gives you a loan, but they don’t give you the money. Instead, they take your borrowed money and put it in a savings account – a savings account in your name that you are not allowed to access until you pay off the loan. When you pay the loan as agreed, the bank will send a good report on your behalf to the credit bureaus with the aim of raising your FICO. This is the dumbest con game I can imagine. Banks lending themselves money, paying themselves back with their own money, but charging you the interest on the loan with end goal being the ability to turn around and lend you more money! Are you fico-kidding me? Please do not do this.

Here are some other colossally bad ideas pundits suggest to raise your FICO: take out a loan with a co-signer (never), become an authorized user on someone else’s credit card (no way), apply for a bunch of store credit cards like Target, GAP, Kohl’s, etc. (just go throw your money in a storm drain), you get the idea… Here is where it leads:

DACdckGXUAAq4gZ.jpg-largeConsumer debt back up to record highs – insanity prevails, for now…

People write entire books on credit scores and how to manipulate them upwards, or dedicate entire websites to the endeavor. If you want to see some sheer madness go to myficodotcom. They have a user/web forum where frequent contributors proudly list their FICO scores across all 3 credit agencies in their “sig line” along with gifs of the credit cards they hold and their corresponding credit limits & interest rates. Here they discuss tips and tricks to get more credit in order to buy more things at lower rates while earning more “points” on their credit card purchases. I refuse to even link to the forum because it reads like monetary pornography and the domain should be entered into your web filter or DNS server so that access to the website is forbidden.  It is Insanity.

How To Profit:

As we’ve talked about in the past, owning bonds means you (the investor) get paid when other people use your money. Residential mortgage bonds remain a very attractive investment. If someone wants to pay me money so they can have a 5 bedroom/7.5 bath house with a bonus room, 3-car garage, and a swimming pool and their mortgage interest payments can cover a good portion of my monthly expenses in the process, then I don’t see why I should turn this down – especially when both parties see it as a good deal. They get the house they want and have 30 years to pay for it while I have more time to check on the bass & trout populations of our local rivers.

fly fishing photo
A little fly-fishing. Photo by Carl Heyerdahl

Buying stock in credit card issuers & credit reporting agencies has been a no-brainer (1). If you own stock in V, then every swipe of a credit/debit card brings a percentage of the corresponding purchase your direction, and the America Bankers Association estimates there are 10,000 swipes every second around the world. This is why Visa saw an operating income of $8B in 2016 with a profit of $6B on the year. And where did a chunk of that $2B in net operating expense go? It went to FICO, a stock I also own. You see how this works and how you can profit? You can cover the spectrum of the credit market in just a few investments! Keep swiping baby, I’ll be enjoying an iced-coffee on the veranda if you need me.

Real Life:

I do not know what my FICO Score is – I literally have no idea. I thought about pulling it and posting it, but all the websites I looked at feel like massive data-mining schemes so I steered clear. I hope my FICO is a big juicy 0 or heading that way, as I do not plan to take on any debt anytime soon (as in ever) and a FICO Score has no bearing on the value of my cash.

A bullet in a Visa card
Shoot ’em dead – by frankieleon @ Flickr

The sad thing is seeing folks defined by this number, and then making decisions based on their FICO standing. “If I apply for a new job they may run my credit and ding my FICO”. With FICO raking in profits of over $600M per year, I can tell you who is going to win the credit game. It doesn’t matter what’s in your wallet, you will be on the losing team. My suggestion would be to get on the sidelines as quickly as possible. Trust me, the view from the court-side seats is much more enjoyable…

(1) Disclosure –  I am long V, FICO, and BRK.B and other credit card issuers and credit agencies not specifically listed.

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