By Barry Maher
People always focus on the accuracy of the information in someone’s credit report. And obviously if John A. Smith’s bad loan ends up on John B. Smith’s report, John. B. Smith has got a problem. And so does anyone who wants to sell him a house.
But suppose all the information in John B’s report is accurate but his actual credit score is based on simplistic, incomplete or just plain silly assumptions?
Let me note right now that my own credit score is fine so this is not about a personal beef. But I just heard from one of the subscribers to our newsletter, a woman who also has a good solid credit score. She sent me a copy of the rating.
Her score was 769. That’s 769 out of a possible 850. According to the report’s key, she had better credit than 70% of the American public. That would be impressive if credit scores were an accurate measurement of an individual’s credit worthiness. But let’s look at the details.
To end up with a score of 769, she was docked 81 points. That probably won’t make much difference to her. Her score is still good. But to other people that kind of penalty could easily make the difference between getting a mortgage and not getting a mortgage, between paying a decent rate for a loan or getting overcharged, even between getting hired or watching their unemployment run out and their savings empty. And that can make a bad credit score a self-fulfilling prophecy.
Here were some of the so-called “key factors” that lowered this woman’s score.
First, “You have no real estate account.” Actually that meant she has no real estate loans. She owns two houses free and clear. Doesn’t owe a penny. If someone really wanted to know her credit-worthiness that might be something that would be important. It’s certainly something that’s easy to check.
Maybe it’s just me, but isn’t someone with over $500,000 in real estate equity in better financial shape than someone who’s struggling to make the payments on a home loan, even if they’re successful in that struggle. Who’s more likely to be able to pay off additional debt?
Second, her score was reduced because “The available credit on your open revolving credit accounts is low.” She pays off her credit cards every month so there’s no reason for her to have a huge credit limits on cards that could easily end up lost or stolen. But in any case, according to the details of this very credit report, one of her cards has a $25,000 limit and three other have around $10,000 each. Is $55,000 in available credit low, compared to the average American?
Besides, if I’m looking for a home loan, how does the fact that if the loan were granted I could immediately put myself in an additional $100,000 worth of credit card debt make me a better credit risk?
The third reason for the reduction? “You have too many inquiries on your credit report.” And yes, there were actually 11 separate inquiries on her report in the previous year. So I asked her about that. It turns out an elderly relative gave her power of attorney over a very significant amount of money. Apparently, since banks routinely provide debit/credit cards with an account, they must routinely check credit on anyone who is given power of attorney over that account. Even though in this case, she consistently refused their credit and debit cards.
Still, the bottom line is that having access to these additional funds has apparently made her less credit worthy.
Fourth, “Your oldest revolving credit account was opened too recently.” Actually, her credit report shows that her oldest revolving credit account was opened in 1990. Is that too recently? If so, too recently for what? Does the computer that creates these credit scores even use the credit reports they’re supposedly based on. And yes, some of the woman’s other credit accounts were opened more recently. But if a human, rather than a machine, had looked at the report, they would have seen that her new accounts were issued by the same companies that held the old accounts. And everything was the same as the old account except for the account number. Why is that? Because the original account numbers had been compromised, not by the woman, but by poor security on the part of the issuing company or one of their merchants. So the companies had cancelled the old account numbers and replaced them with new ones.
Obviously someone who does business with companies that allow their data to be hacked has to be more of a credit risk. I mean, would a truly responsible person do business with a company like CitiGroup or Sony or Barnes & Noble or be lax enough to carry a credit card issued by a an organization like Bank of America or Chase?
So these are the listed reasons why she was docked. My guess is there are other reasons that are just as far off the mark. As I mentioned, none of this is a particular problem for her. But the obvious question is this:
Are the criteria on which these scores are based really the best way to evaluate a person’s credit-worthiness?
Or is this simply the easiest information to collect? And if people who really need credit are having their scores lowered because some company they patronized compromised their credit card numbers, or because the scoring system doesn’t properly recognize the amount of credit they have available or how long they’ve had their credit cards, or perhaps because they’ve opened too many bank accounts or some other equally ludicrous reason, does this make any sense?
Is it fair to people how are being evaluated?
Is it fair to the merchants and landlords and nowadays even potential employers who are relying on these credit scores?
Is it working for anyone besides the companies that are profiting from generating these evaluations?
In this country, we worry about the government having too much control over our lives. And we should. But at least we get to vote on the government. How much power do you have if some computer at Experian or TransUnion or Equifax decides to dock your credit score 81 points. Or 160 points. Or 300. Especially when the credit bureaus won’t even tell you they’re doing it and their reasons make as much sense as these.
Sure you can contest an error on your credit report. But what can you do about the standards the reporting companies are using to rate you?
I’ve been relying on credit reports to help me select rental tenants for years, though some of the best tenants I’ve ever had I only got because I ignored the reports. Maybe in the future, I should just cast their horoscopes or flip a coin or read the entrails of a dead pigeon.
It would certainly be cheaper. It might even be fairer. (Maybe not to the pigeon.)
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