Other than payment, FICO is the only variable that updates.
I get that. However, that doesn't mean that it is useful or that it if it is that it is obvious how to use it.
I'm not trying to press a point or present a conclusion here. I made that chart as part of developing an understanding of how to use FICO scores.
what information does the trend convey? I believe it conveys how risk has changed since the loan was made.
Good story. Sounds like there could be some truth to it, but that doesn't make it so.
I made my initial decision based on a level of risk. If that risk is gotten worse, then there is a chance the yield is no longer good enough.
That statement is correct, obviously. The question is whether moderate changes in FICO can be used to make an indicator that makes us money. Giant changes in FICO are surely meaningful, because I see them in so many loans that go bad. A guy drops by 150 points, that loan is gonna croak. (except I had one that didn't) It isn't clear tho whether you can get an indication early enough to do anything useful.
Is a moderate change in FICO a good indicator that will make us money? I don't yet know.
It would appear that you and I agree that small changes in FICO are unlikely to be useful indicators.
So as you can see from the chart, a borrower could have had an initial FICO anywhere from 660 to 815, and still could have been graded "A", and gotten the lowest interest rates. (A range of 155 points - or maybe more!) Astonishing but true.
Suppose Joe's score was 750 when he took out the loan. Now, a year or two later, his FICO score drops by say 50 points, and suddenly you think you need more interest? Maybe you do. Maybe it dropped because something bad happened. However, on the day the loan issued, he could have had a FICO of 700 and still got the same exact interest rate.
How come that interest rate was good enough then for a guy with a 700 FICO then, and suddenly its not good enough for a guy with 700 FICO now?This inconsistency makes me unhappy.
I'm glad you mention the noise level (standard deviation) in FICO scores. That's an important piece of understanding how to use them. I don't claim to have the rest of the pieces yet.
I know many people talk about "FICO trend", as if they can look at those curves of FICO vs time and learn something. I have a conceptual problem with that. I see patterns too, just like everybody else, but I don't know that they are meaningful. Here's the thought experiment that makes me a skeptic: The history of FICO vs time is known to the credit reporting agency that computes the current FICO score. They're pretty smart, and would use every piece of information they have to compute the current FICO score, and make it as good a predictor of future default as possible. This means that if there is useful information in the shape of the curve, they have already used that information to come up with the latest FICO score. If that's right, you can look at the shapes and "see things", but they will provide you no useful information.