Is Common Sense Returning to Consumer Lending?
Yesterday I read a post by The Finance Buff which the writer entitled “The Credit Crunch Finally Hit Me.” After reading the post, Mr. ToughMoneyLove had to leave a comment that disagreed with the title and premise of the article.
The author (“TFB”) told us that he/she had applied for an unsecured personal line of credit from Wells Fargo Bank. The credit application had recently been denied. TFB was surprised enough by this to post about it:
The underwriter said the reason for the decline was that the size of the credit line I asked for was too high for my income. Fine, tell me what you can give me. No, they just flat out declined me. It’s been widely reported that credit card companies are cutting people’s credit limits. They have spared me so far. Ah, the credit crunch finally hit me.
Not to be deterred from this search for more credit, TFB appealed to higher powers in the bank:
The phone rep told me the underwriter couldn’t give me a higher credit line because I already have plenty of credit available to me from my three credit cards. The underwriter said if I were to max out on all my credit cards, the required payments would be too high for my income.
To me, this is the important part. TFB was proud of his/her 790 credit score. But that high score did not prevail this day. Why? Because the bank actually looked at the borrower’s debt to income ratio. It didn’t matter that the ratio of actual to available credit was low. (FICO loves that ratio.) Common sense in loan underwriting – where did that come from?
How refreshing and novel to read this in an age of credit score worship. I thought that a high credit score was the ultimate indicator of your financial merit? Isn’t that what FICO and personal finance bloggers galore have been telling us? The FICO score does not even consider income yet Wells Fargo used it in this case to deny credit to a 790 applicant.
If you think about what Wells Fargo did in this case, doesn’t it make sense? Doesn’t it make you wonder why FICO and all of the institutions that worship the FICO score de-emphasize or completely ignore a person’s income or net worth when extending consumer credit?
I hope this little anecdote is evidence of a systemic return to common sense in consumer lending. I hope it means that lenders will look at all aspects of a person’s finances and not just their skills at playing the credit score game. I hope it signals the beginning of the end of credit score dominance in personal finance. I am sick of it.