Banking on Higher Credit Scores
There has been an interesting debate online about the role that financial institutions should play in helping consumers repair their credit scores, and I thought I would weigh in.
The debate started with a blog post by Felix Salmon. From there, it moved to The Atlantic, where it has received a large number of comments this month.
For those who are not interested in reading the backstory, everything traces back to a college professor who took out a payday loan because her credit union would not approve her application for a personal loan. The authors of the two articles I linked to then begin to posit about the role financial institutions should play in helping borrowers improve their poor credit scores. Certainly, there is some value in having borrowers with higher credit scores. That usually points to people who are paying their bills on time. But should this type of goal be an explicit objective for a financial institution?
If this type of program were to be introduced, the most likely scenario has to involve the federal government. It is unlikely that the banking industry would gather itself and decide to make this a common goal.
Certainly, as was pointed out last week, credit scores are moving in the wrong direction, at least as far as banks are concerned. And credit scores are being used for far more than making decisions about creditworthiness. Companies are making hiring decisions based on credit scores. Insurance companies are using credit scores to determine how likely people are to be good drivers.
So, if the federal government is to get involved, perhaps the best way to tackle the program would be to create something similar to the Community Reinvestment Act, where financial institutions are required to make a certain number of loans in urban and low-income neighborhoods.
A brief aside: Every weekend, The Home Depot near my house holds free classes to teach DIYers (like myself) how to make basic repairs or improvements to our houses. It’s a great idea, but The Home Depot’s ultimate goal isn’t totally altruistic. They are hoping to sell me more supplies and tools.
Should banks take lessons from The Home Depot? By helping borrowers repair their credit scores, would those borrowers be more likely to borrow again and again from that financial institution?
This is a very brief entry point into what could, and probably should, be a much larger debate about the role of financial institutions in an overall economy. But it’s Friday and participating in an interesting mental exercise is a great way to kick off the weekend.
Should there be some kind of credit repairing system to help consumers get better rates? Isn’t that in everyone’s best interest?
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All financing for dealers with Chrysler Financial has been halted leaving dealers short of cash with little hope for survival. Dealer trades must be accomplished with checks (cashier’s checks preferred) not through floorplan swaps. Standard rated contracts may be accepted by CF but all other programs seem to be off.
While credit scores have helped reduce the time it takes to underwrite credit, it is debatable that they have helped the middle class of our country. They have helped the “rich get richer and the poor get poorer”.
They gave a false sense of security to pseudo-lenders and pseudo-investors and certainly to the regulators. Yet look at the chaos caused by credit of all types associated with some type of reliance on credit scores. And look at the dis-service to the middle class and lower class as other organizations start to use them.
When FICO first introduced them, the major West Coast banks were among the first to use them and found that the “rocket science” was not all that it was presented to be. Remember, using credit scores is like driving a car while only looking at the rear view mirror. What went wrong takes too much time to explain.
As for the government trying to “help” consumers? Other than fighting wars, there is little else that they do well. Dave Ramsey does more to help consumers than the government and the major banks combined! And he is getting rich while helping them! Yea for entrepreneurs!
Frank makes a good point. During my days at Huntington Banks, I recall watching a presentation from Ann Tonks from SeaFirst in the early 90’s – one of the first banks to rollout “Tier Pricing”. The first thought that went through my head was “but the credit score is only one indicator of many” and will certainly cause excessive losses (due to false sense of security) on the lower scoring population and adverse selection and thin margins for prime lenders.
The best way for a consumer to enhance their otherwise dismal score is to add a comment to their credit bureau explaining their major derogatory references. Most consumers are not aware they have this option. Such an explanation may persuade the lender to make an exception to their written policy.
When FICO first introduced credit scoring in California, I one of ten credit administrators at the 10 largest West Coast banks (including SeaFirst) that evaluated it. When challenged, FICO admitted that the primary determinant of a good score at that time was owning a house in California for at least 5 years. Duh! Back then, anyone facing loss of income had a positive quick equity and could sell, payoff most debt and start with a new house. As FICO became more sophisticated in the quantitative math, they seemed to have lost that first basic lesson.
I am amazed that no lender has asked FICO for a performance guarantee on their product. If they really believed in it, why not guarantee it? Well, only the FED would have enough money to do that; but, isn’t that reliance what many major credit providers have been banking on?