A FICO score probably instills fear in the hearts and minds of anyone needing to borrow money. The three-digit number is the key to not only obtaining credit but also the interest rate paid for such credit. What is a FICO score and what does it mean? FICO is the acronym for Fair Isaac Corporation, a Minneapolis-based company that first analyzed personal credit history and created a report on borrowing and repayment patterns. Fair Isaac distilled the score into a three-digit number ranging from 300 to 850. A higher score means a greater probability of a person qualifying for a lower interest rate. The three main credit bureaus, Equifax, Experian, and TransUnion create their own reports from information gathered from their network of lenders to devise a credit score for you. If you want to obtain your credit report for no charge visit www.creditreport.com. 

 
 

The recent spate of borrowing by the Federal Government made this writer think about how effectively Government borrows and their interest rates paid. As a participant in the credit market (like anyone else), what would the Government’s FICO score be?   The introductory chart provides the criteria and weighting for judging. The academic analysis presented is a subjective exercise.

The Government’s payment history is stellar. They have never missed a payment. 

Score – Excellent

 
 

The Government debt ceiling is over $12 Trillion. This is a staggering amount by any measure. The score takes into account not just the amounts owed but also how much credit is possible. If the debt ceiling is $12 Trillion it means the outstanding debt is very close or at this level, meaning the ability to borrow is at least near a maximum percentage. In addition, since the Government only takes in $2.7 Trillion in revenue, the ratio of debt to income is uncomfortably high. 

Score – Poor

 
 

The nation is over 200 years old and thus is a reliable creditor.  

Score – Excellent

 
 

If one looks at how much Government debt increased in the last few years and how much it increased in the last year alone, it is not hard to imagine this facet of the FICO score taking a huge hit. 

Score – Poor

 

The Government has many creditors investing in various Treasury Bill, Treasury Note, and Treasury Bond denominations and terms. 

Score – Fair

 
 

In summary, we have 50% weighting in the Excellent category, 40% in Poor and 10% in Fair. Our composite score in this exercise is in the 620-659 range that is considered Fair. 

 
 

While the above is an academic exercise, it illustrates how the Market might view the credit-worthiness of the Government just as any other borrower. The suggested FICO score places the Government in a sub-prime category, meaning it would not qualify for the lowest rates of interest since it presents a higher risk profile. If a credit counselor were to advise the Government on improving their FICO score, they would suggest a reduction in the Amounts Owed criteria.

 
 

There is a paradox, however, with respect to US Government credit. On the one hand, the FICO score for the Government was just Fair. On the other hand, the interest rate on government credit is near historic lows. Shouldn’t the interest rate be higher since they are more risky by virtue of their perceived credit-worthiness? If an individual borrower with a low FICO score merits a higher interest rate, why not the US Government?

 
 

The answer to this paradox is the ever-present condition of confidence. As our first economic law postulated CREDIT = CONFIDENCE. The investment market retains a great deal of confidence in US debt despite empirical evidence to the contrary. The implications for investors (individuals, pension funds, retirement plans) are significant. 

 
 

Jim Mosquera is the author of The Sentinel Economic and Financial Newsletter (http://www.TheSentinel.biz)