Banks Teaching the Futility of Chasing Credit Scores
Banks and other lenders are now teaching many of us a lesson. The lesson is the futility of focusing on credit scores as a financial planning strategy.
There are websites dedicated to describing different tactical score-boosting moves. And, of course, there are plenty of opportunities for consumers to pay the credit score industry for the ability to monitor their scores on a daily or even real-time basis.
Lately, banks and other lenders have decided to take matters into their own hands. Consumer credit accounts – including credit cards and HELOCs – are being reduced or even closed out by the lenders. It does not matter if the consumer has been a 100% responsible borrower, with no late payments and manageable debt loads. Banks are arbitrarily closing or reducing lines of credit to simplify and lower the risks of their own lending portfolios. Those precious credit scores are being damaged even though the consumer did nothing but obediently follow the credit score rules.
According to this article from the U.S.A. today, the median credit scores dropped by 5 points nationally in 2008. In parts of California, Arizona, and Florida, the median scores fell by 17, 14, and 12 points respectively. Again, these declines are primarily attributable to actions by credit providers, not credit users.
Part of the problem is that many lenders originally used poor underwriting standards or processes when the credit lines were first extended. Now these same lenders are re-visiting what they did initially and making adjustments. A consequence of the banks’ credit “do-over” strategy is that the borrower’s apparent credit worthiness falls. Because the tentacles of the credit score reach into all aspects of our financial lives, we suddenly become less worthy. Costs of credit and insurance go up. A rapid decline in median credit scores is nothing to joke about for a lot of people who are affected.
Part of me wants to say “I told you so” because Mr. ToughMoneyLove has been preaching against credit-score centric behavior for a long time. On the other hand, something positive can come out of this lesson. Some consumer advocacy groups and even politicians are paying attention and talking about intervening.
Generally I am opposed to government intervention into our financial affairs. But if intervention can reduce the influence of the credit score in our financial lives, I am all for it. Such diminished influence will allow us to direct our money energies at things that really matter, like building and preserving wealth. An intervention that breaks a cycle of credit score addiction can be a good thing.
What are your thoughts on what is happening with credit scores? Do you think the government should intervene and regulate the credit score system?