NYT: Credit Score is the Tyrant in Lending
This was a very interesting article on credit scores from the New York Times…on the one hand, the article seems to be saying that credit scores are still relevant and being used by the banks for lending, yet the people at FICO are saying that their scores are not the best predictor of default.
Here’s the best excerpt, in my opinion:
“Mortgage brokers,” said Craig Watts, the head of communications at FICO, with a tone of bemused exasperation. “Some of them are kind of cranky these days.”
The mortgage brokers, he went on to say, were seeing things only from their own narrow perspective — the perspective of someone who wouldn’t get a commission if their clients couldn’t get a mortgage. Thankfully, from his spot high on the mountaintop in FICO-land, Mr. Watts could give me a broader, more sophisticated take on the topic. Thank goodness for that.
A FICO score, he patiently explained, is merely a tool that lenders use to help manage their risk; criticizing it is akin to criticizing “a saw because the construction job turned out badly.” With big banks making thousands of credit decisions every day, they couldn’t possible do it without some standardized benchmark; a credit score provided that benchmark. Over the years, he added, the algorithm had gotten very good at predicting the odds of a borrower defaulting.
In fact, FICO scores are not the best predictor. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores, according to Dave Zitting, the chief executive of Primary Residential Mortgage, a leading mortgage lender. And yet, he said, “The credit score has become the line in the sand for the banks.”
The author’s final conclusion was this:
“But what I find incredible is that we have imbued credit scores with these magical predictive powers — and yet the companies coming up with the scores can’t even get the borrower’s address and employer right. It would be funny if it didn’t matter so much.”
Or does it? I wrote an article last week on Foreclosure Industry about my thoughts on credit scores. I personally am not so sure credit scores are that important right now. Sounds odd for a blog that’s teaching people how to fix their credit, right? I think so too — but what if I’m wrong? (Which is entirely possible.) I’d like to know that my credit score was good in case I needed to borrow money.
What do you think?
DISCLAIMER:
****CHRISTINE SPRINGER IS NOT A LICENSED ATTORNEY OR FINANCIAL ADVISOR. THIS BLOG IS COMPRISED OF HER OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL OR FINANCIAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY OR FINANCIAL ADVISOR BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****
DIY Credit Repair Step 1: Get Your Credit Reports
The first step to get started is to obtain copies of your credit reports from all three credit bureaus. Consumers are entitled to a free copy of their report once each year, depending on which region of the country you live in. You can use the Annual Credit Report site, but I have a couple of caveats.
First of all, the domain name is confusing. Be careful that you request your report from the real Annual Credit Report site and not another site that charges you money for the report. (My link above will take you to the correct site, by the way.)
Further confusing the issue is that you still have to pay for your score, which is not included with the free reports every year. So if you wind up on a website that requires you to pay for something, you are probably not on the correct Free Annual Report webpage.
Second, I think the credit bureaus have set up the online request process to make it difficult for you to get your reports. I’ve personally never been able to get my Equifax report because I couldn’t answer the questions about myself correctly, which I find strange….it is my information, after all!
The online portal was probably set up to cut down on the credit bureas’ administrative burden under the law. It probably costs them a fortune to process all the investigation requests and the fewer requests they get, the better.
Because of these two issues, I suggest you send a written request to the credit bureaus instead of using the online request site. I’ve used this form, which I’ve downloaded directly from the Free Annual Report site to successfully request all three reports:
Free Annual Credit Report Written Request Form
You only have to print it out once and send it in to the address on the form to get all three of your free reports. I suggest you use a tracking service, such as certified mail, to make sure the credit bureaus receive it. Then wait for the reports to arrive in the mail.
You are only entitled to one free report each year, and if you’ve already used your one-per-year request, you will need to pay for the reports, which could add up if your dispute process lasts longer than a few months, because you may have to pay for additional reports and scores.
Last year I subscribed to credit monitoring service that allows me access to my credit reports anytime I want. I use True Credit and have actually been happy with the service overall. They send alerts every time something changes. (Disclosure: I was not paid anything to mention True Credit!)
It might actually be cheaper to subscribe to a service than paying for multiple credit reports while you clean up your credit. Do the math on this and see if it makes sense for you. I didn’t initially think the service would be that useful, but I think it will be useful in documenting the changes in my own credit score.
DISCLAIMER:
****CHRISTINE SPRINGER IS NOT A LICENSED ATTORNEY OR FINANCIAL ADVISOR. THIS BLOG IS COMPRISED OF HER OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL OR FINANCIAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY OR FINANCIAL ADVISOR BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****
Get Your Finances Under Control Before You Repair Your Credit
I’ve personally been down the DIY credit repair route before and I learned a lesson: it doesn’t do any good to fix your credit if the underlying issues relating to debt and overspending are not addressed.
Simply put, it doesn’t do you any good to start fixing your credit unless your financial situation is under control. I think, as Americans, we need to be honest with ourselves about our finances. We’ve been overspending for years and now that things have become economically challenging, many of us have been caught in a tough financial position.
I think this step is addressed by having a plan to deal with how you will pay your bills in the future. I’m not a financial advisor, but there are plenty of people out there who are and can help you come up with a get-out-of debt plan. Some people advocate budgets; others have other systems for dealing with how to pay bills. I’m sure we’ll spend some time talking about this more in depth in future posts, but I wanted to mention it before we start talking about how to repair your credit.
The point is, come up with something that is workable for you, because if you don’t pay your bills, your credit repair efforts will be a waste of time and money.
DISCLAIMER:
****CHRISTINE SPRINGER IS NOT A LICENSED ATTORNEY OR FINANCIAL ADVISOR. THIS BLOG IS COMPRISED OF HER OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL OR FINANCIAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY OR FINANCIAL ADVISOR BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****
Credit Scores and Financial Responsibility
If you read my blog post on the ForeclosureIndustry.com site about whether credit scores really matter, you know where I stand on this issue. If you also read the comments on that post, you also know that Josh and I have differing ideas on whether credit scores matter.
Josh’s theory is that most consumers will pay higher interest rates because they need a car, or whatever it is they have to finance. I see where he’s going on that line of thinking, but I’m not sure I agree, and here’s why.
If 25% of the people in the US now have credit scores below 600, and the FICO score doesn’t really distinguish between people who strategically default on their mortgages and people who can afford to pay, I think it’s likely that there are a lot of people in that group who had good credit at some point and who probably were financially responsible before the economic mess.
So, how many of you out there consider yourselves financially responsible? Have your ideas changed since the bottom dropped out of our economy? What is your idea of fiscal responsibility now? I am personally all for paying for things for cash these days, but there might be some of you out there who think differently.
What does it mean to you to be fiscally responsible in this recession? We’d love to hear from you.
Christine
Got questions? Send me an e-mail: Christine@desertedgelegal.com
DISCLAIMER:
****CHRISTINE SPRINGER IS NOT A LICENSED ATTORNEY. THIS BLOG IS COMPRISED OF HER OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION IN THIS BLOG.****
Let Me Introduce Myself
For those of you who are new to this site, my name is Christine Springer. I am the newest contributor to this blog on credit. I’ve spent the last year writing the blog at www.foreclosureindustry.com .
I consider myself a paralegal and have been in the legal field for the last fifteen years or so, so most of what I write is from a legal perspective. I am personally interested in figuring out how to help people move on with their lives and having a better credit score seems like a good place to start. I’ll be exploring this issue, as well as others, here on this blog, so I hope you’ll subscribe and be a part of the discussion.
You can contact me at Christine@desertedgelegal.com with any questions. Please remember, I am not a licensed attorney and cannot give legal advice. I am also not a financial planner and don’t give financial advice professionally either. Please consult with professionals in these fields if you need legal or financial advice.
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