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?