Friday, April 11, 2014

Fair Isaac's Score

Recently I went through the annual credit report exercise recommended by one and all financial writers. I expect because I recently moved, I couldn’t get my credit reports on line or by phone. I had to send in a written request with copies of a lot of personal stuff, driver’s license, utility bills, proof of Social Security number, that sort of thing. In due course of time with one hiccup, I received copies of all three credit reports (Equifax, Experian, and Trans Union), but not my credit score. You must pay extra to get your credit score. There were a couple of very minor problems on one of these things. They misspelled my name in one place, although they got it right everywhere else. My former place of employment was listed as a residence. This was corrected with a quick phone call. Still, getting the reports was a pain in the butt. It took too long. When I even asked for a couple of simple corrections I felt like I had gone to the local headquarters of the brain police with a request to have incriminating evidence removed from my dossier.

There is one more player in this game, Fair Isaac, a mysterious entity that uses information collected by the three agencies to generate a credit score. Your FICO score is a three digit number that determines your access to credit and how much you pay for that credit. How that number is calculated is beyond the scope of a blog article. However, it is a measure of how you use credit. These companies want to see a consumer who is a faithful debt slave. They expect you to have two kinds of debt revolving credit (credit cards) and installment debt (car loans, student debt, and mortgage payments). Then they expect you to pay it in a timely manner every month for the rest of your life. With the credit card, it is enough to use it even if you pay it off in full every month. Just don’t put more than 30% of your credit limit on any one card in any one month. Even if you pay it off every month, if a high balance is reported to the credit bureaus it will ding your credit score by a bit.

Obviously your credit score affects your ability to get a car loan or a credit card. You can live without those things. It also affects your ability to get your first mortgage. Fannie Mae and Freddie Mac, those two quasi governmental giants that control 2/3 of the mortgage money in the country recommended banks use the FICO score in determining access to mortgage money. This proved to be a bad idea, since it doesn’t appear that your credit score is directly connected to your income in the same way your credit history is connected to the score. After the Real Estate crash of 2006, I have read that mortgage lenders, burned by their use of credit scores, were returning to manual underwriting. My initial investigations indicate this very desirable return to sanity is not wide spread in the industry.

Unfortunately you can’t get out of the game. Your credit score also affects your ability to get a job, a security clearance, or rent an apartment. Even if you are a debt hating old school retired curmudgeon, like me, your credit score still has an effect on your car and homeowner insurance rates. That’s right folks, if your credit score tanks, your insurance rates will spike thanks to our friends at Fair Isaac. This is so wrong it gives me fits just thinking about the subject. The correlation between your credit score and the cost of your insurance claims is simply beyond argument. However, no one has established a causal link between bad credit and car accidents. Maybe you aren’t paying attention when you drive because you are worried about your credit score? Who can say? It seems to me to be a convenient means of redlining, implementing higher rates for people who live in poor neighborhoods that are inherently more dangerous. If there was a strong correlation between income and accident rate or race and accident rate, could the insurance companies get away with spiking rates on that evidence? I don’t think so.

Your credit score should not be this important. Four companies that are inadequately regulated (if you believe half the horror stories I have read) have been given way too much power by the Government. If there is a problem, the burden of proof lies on the consumer, not the lender. If you are accused of owing a debt that you in fact do not owe, you are required to prove a negative. Logically, this is impossible. Yes the world is filled with scam artists, cheats, and ne’er-do-wells, as well as the innocent victims of divorce, illness, and the loss of job. All of them are bad credit risks. There must be a way for lenders to do their due diligence before handing out their money to strangers.

However there must be a better way.

I have recently completed reading the 2009 edition of Your Credit Score (Your Money & What’s at Stake) by Liz Weston, a respected financial columnist at MSN. If you are having a problem with your credit score, correcting your credit reports, or identity theft I recommend obtaining the latest edition of this book. In it Weston covers many strategies to improving or repairing your credit score. It is important that your actions are appropriate for the exact particulars of your situation. In some cases what will improve your credit score will make it worse in slightly different circumstances. She also covers the exact procedures and methods to use when communicating with these entities.

1 comment:

  1. The industry definitely needs better regulation, but scraping credit scores all together isn't the answer.