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Let’s Stop Praying to the Credit Score

posted by Nathalie Martin

Mortgage brokers, and those hoping to buy homes, are disgusted by the preeminence of the credit score in “scoring” a home loan today. According to an article, in Friday’s New York Times, this overemphasis on credit scoring in the home mortgage market is not helping the economic recovery either, because people just cannot qualify for a home. Some people’s scores have decreased even though they have done nothing differently. The author’s interesting article recounts many mistakes in his own credit report, a common phenomenon as it turns out.  The author is so disgusted he thinks the CFPB ought to take up credit reporting and scoring as a high priority once it is up and running.

I agree that this is a shame, all this focus on credit scoring in lending, but I also think consumers can whip themselves into a frenzy over these scores, even when they do not want, need, or plan to use future credit. Always remember what the score is for, to qualify for more credit. Staying out of debt is as good a strategy as any for keeping the score high. Students acquire more credit cards than they need in order to get three open items.  Before they know it, their scores are lower because they cannot pay. I know a terminally ill woman, with no job and no intention to take on any more credit.  She wants to keep paying dribs and drabs on her enormous medical debts to protect her score until the end. Why?  I hate to give these scores, and the agencies that create them, more power over us than they deserve.

Comments

Depressingly, this is bad advice. In the real world, the score is for much, much more than credit. Getting a job now often involves your credit report and FICO score (FTC, as do renting an apartment, applying for a mortgage or getting a small-business loan. You can hate the tyranny of FICO and the death of underwriting and attendant arts (I do), but you must advise people to maximize the FICO score.

Under the scoring system's algorithms, 'staying out of debt' is not the complete strategy. Keeping the score high actually does involve students acquiring more credit cards than they need, primarily to produce a low utilization ratio and a broad and deep on-time-payment history. I hate to give FICO scores, Fair Isaac and the CRAs any power at all, but the right way to do this is to play to the algorithm while applying political pressure better to regulate both these actors and their process.

As a question to the lawyers: What protects the credit reporting agency from a libel suit when they knowingly report false information?

Or if a CRA's negligence leads to an identifiable loss (for example, if a borrower must pay a higher rate on a loan than the best rate they would have been offered without the mistake), then what protects them from that liability?

There must be something; if credit reports are as inaccurate as claimed, then there would otherwise be a lucrative class action suit somewhere. But I'd be curious to know why.

yglesias and kevin drum are going back & forth about using the FICO score for hiring...

The mortgage broker complaint is an awfully, awfully small problem in the scheme of things. Someone who already has a home and a job can't borrow a lot of money to change their consumption preference so a transaction fails. Whine. Maybe the transacting parties have to wait a year or two. It's hardly hardship. What is the social welfare aspect of that? It's nonexistent in an absolute sense, let alone compared to the social welfare benefit of high credit standards after what we just went through. Not every transactional disappointment needs a nationwide law to redress it. Given the size of the mortgage industry, they can start up a competitor and prove their thesis. They should think like entrepreneurial businesspeople, instead of lobbying for government help.

What WCW says.

A small personal story might illustrate the weirdness of FICO. I'm a middle-aged guy with a good job and fanatical financial hygiene. I decided to refi my home recently. There were no serious hitches, but I found that my FICO--although very good--was not quite perfect.

The reason given was entertaining. I have credit cards, but always repaid them at the end of the month. (Good hygiene, y'know.) Apparently, only revolvers get perfect scores.

wtf?

Very interesting article! Here is a great article on what causes your credit score to decrease!

http://helpsavemydollars.com/2010/07/how-to-destroy-your-credit-score/

Great point about how employers now use these scores in hiring. I've had to help many people improve their scores to get a job or pass the bar, but only when they have had bad credit, not no credit. Does anyone else have experience with people being turned down for a job becasue they have little or no credit? I'd like to learn more aobut this prospect, but would be surprised.

I love your definition of good hygeine and just love your story. Some would also call you a deadbeat for paying those cards in full each month. Amazing, isn't it!

In the general insurance market, credit-based insurance scoring is now a fact of life, but its potential spread to other insurance products, including life insurance, has critics questioning its use amid renewed concerns fueled by the rocky economy.

Insurers are facing legislative efforts in several states to ban credit-based insurance scoring in underwriting decisions. Not surprisingly, public discontent over credit-based scoring is increasing, as rising mortgage defaults, increasing unemployment and growth in late payments on homes, cars and credit cards have greater numbers of Americans worried about damage being done to their credit scores.

Your credit score is extremely misleading, a person who has one credit card and a high paying job who charges 50% of her credit limit on that card and has problems with that card later on if life and decides to open a couple new cards has a low credit score, nevermind if she has a lot of liquid assets a stable high paying job in healthcare or other recession resistant industries.

If a person is late a few times due to credit card habits or missed notices, that affects the score too.

Credit scores don't predict defaults, although the folks admit that many folks who have excellent credit are having fair credit, those with near perfect credit don't have that issue but then they say they have the most to lose and getting a near perfect score is hard and underwriters give the best rates to excellent credit (different companies have different score ranges, ie a-f, or 300-900 but 20% of the population has the excellent credit that is used for a cutoff say 720 or up on a scale, or a b+)

It's a damned if you , damned if you get caught, people who few credit cards and don't need them but the limit on their original card is low, suddendly they don't like the card perhaps customer care was not to their liking, perhaps gotcha's in terms were added or maybe fees where being charged. So many years go by and wait guess what your average age of accounts goes down by opening two cards, sure if you opened a card 5 years ago, and opened 2 more 4 years, ago your average age of accounts, would be 13/3 or a little over 4 years, but open two cards later on , your age is less than 2 years. Never mind your income or your low debt in personal life or whether or not you revolve a balance and pay interest.

It is true that bankruptcy and foreclosure and tax liens are to be looked at , but even they don't give a clear picture, it is because of medical bills, is it because of a failed business, is it because an investor who is well off financially or not in the dire straights had know choice but to short sale a home in florida or california?

Of course credit scoring cannot take into account certain factors, however models can and should be changed.

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