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.****