My Tough Love Campaign Against Credit Score Obsession (Part 2)
Welcome to Part 2 of my series on credit score obsession and addiction. In Part 1 of this series, I told the story of my son being denied the right to open a savings account at an online bank because he had no credit history. This experience reinforced my belief that the credit industry (with our unwitting cooperation) has unfairly elevated the status of credit scores in our economy. This has led to pervasive abuse of credit scores by not just creditors but by financial service providers of all kinds, by landlords, and even by prospective employers. Unfortunately, too many consumers have allowed this trend to push them into engaging in money behaviors and adopting bad money habits for the sole purpose of maximizing their credit score.
I have been using credit – to obtain mortgage loans – since 1977. I have no idea what my credit score is now or ever. I had never even heard of a FICO score until the late 1990’s. How is this possible? What most credit score addicts don’t realize (or have forgotten) is that consumers had no direct access their FICO score until 2001, when federal law opened up credit scoring records. According to a survey published by the Consumer Federation of America, as recently as 2003 only 2% of adults knew their credit score. Now, any adult with a credit history can access his or her FICO score (for a fee) at www.myfico.com. Many pundits believe that this opening up of the FICO score to public consumption has been a positive development. I am not so sure. I say this because access to FICO scoring has led to obsessive behavior by many consumers who modify their spending and credit usage to maximize their score. More important indicators of financial well being – such as maintaining positive cash flow and increasing net worth- now take a back seat or are ignored altogether.
Score Sharing and Corporate Greed Drive the Credit Score Obsession
What is worse, with the “opening up” of the credit score data, expansive “score sharing” has become standard practice. An increasing number of businesses having nothing to do with offering credit (such as insurance companies, cell phone companies, and landlords) are now using the FICO score to evaluate customers. Fair Isaac and its credit bureau partners are pushing this trend for the simple reason that it makes them a lot of money. The widespread usage of the FICO score outside the direct credit industry is illogical because FICO scoring system awards points based on factors that were selected specifically to predict the likelihood of a person repaying debts on time, nothing more. This is confirmed by the chart below, which illustrates the factors and relative weighting used in the FICO score.
What do any of these factors, for example, have to do with the driving ability and safe driving habits of a person applying for car insurance? Nothing – yet insurance companies use credit scores to rate policies and set premiums.
The Credit Score Obsession is Focused on a Moving Target
Many consumers obsessed with monitoring and manipulating their credit scores fail to realize that they are aiming for a moving target. It starts with the realization that Fair Isaac does not maintain a database of FICO scores, as many consumers assume. Instead, when a lender or other creditor asks for a credit rating for a credit applicant, the FICO score is generated by one of the credit bureaus from which the creditor has requested the report. What Fair Isaac sends the the credit bureaus is software containing a scoring formulathat is derived from random samples of consumers’ credit information. That formula (algorithm in computer parlance) is what is used by the credit bureaus to actually calculate the score. This is one reason why each of the three national credit bureaus will often report different scores for the same credit applicant, even if Fair Isaac is the common source of the scoring formula. Consumers cannot assume that they have a single FICO score that will be accurately and consistently reported by each of the credit bureaus.
As I continue this series, I will explore additional ways in which errors in data reporting and continued manipulation of the FICO scoring system by the credit industry leads to self-destructive financial behavior by credit-score obsessed consumers. I will also talk about privacy problems in credit score usage. Stay with me on this people – we must fight back together and stop the credit score insanity.
Read the Fun and Logical Reasons to Monitor Net Worth Not Credit Score (Part 3 of this Series)