Houston Backs Off _Credit Enhancement_ With Tax Dollars

Normally I just update my previous blog entries if there is a subsequent development in the story. However, I’ve decided that it makes more sense to do a separate entry for this one. You’ll recall my earlier blog entry this week on Houston’s proposal to use taxpayer dollars to help some citizens get better credit scores, which would ultimately help these people qualify for a mortgage (see story here). The latest development is that Houston has backed off the plan. From the Houston Chronicle:Housing Director Richard S. Celli said that the plan would only have been able to help applicants pay off installment debt like student loans, and not revolving debts, such as credit cards.“This program was never intended to pay off someone’s flat-screen plasma TV,” Celli said. “This program was intended for hardworking, credit worthy low- to moderate-income individuals who needed a helping hand in paying off some debt like a medical bill or a student loan.The city has provided down payment grants and closing costs for 872 families since 2005. Only one family has ever had a foreclosure, Celli said.Pay particular attention to the first paragraph. The housing director says that the payments would only have applied to installment debt. If that’s the case, then the city of Houston really is being led by a bunch of idiots. Here’s why: installment debt accounts for very little in the FICO equation — especially in regard to utilization (see story on utilization here). The $3,000 grants would have been a total waste of money. They would have amounted to a nice gift to the recipient and nothing more. Scores would have been minimally impacted — if at all. There was no way that scores would jump 10 to 20 points (the goal of the program) by paying down installment debt. FICO simply doesn’t reward that kind of repayment (not even when the debt is completely satisfied and paid in full). In the end, it’s a good thing this plan died. Would have been pretty embarrassing when the accounts got updated and consumers checked their credit scores — only to find out that their scores, if they did move, were modestly impacted by the debt repayment.