I’ve heard many people complain bitterly about the American credit scoring system. There are many arguments for and against the system. Yesterday, I talked about the merits of the credit scoring system. Today I will give arguments against the system.
Proponents of the system will argue the credit scoring system is an equal yardstick for everyone. They also argue that people with poor credit deserve it because they’ve acted irresponsibly. Lenders love the system because it saves them time and money in the evaluation process (and they also say this saves the consumer money, but that’s an argument for another day).
Critics of the system decry it for the following reasons:
- The credit reporting system is prone to errors. Numerous studies have shown that almost all credit reports contain erros, and 30% of them contain serious errors.
- Not all credit issues are truly the borrower’s fault. Examples: identity theft, crippling medical bills or extended periods of unemployment.
- Consumers are penalized for 7 years or longer for a brief bad financial run of as little as 3 months.
- Correction of surprise credit reporting errors can take months, which may result in delay of home or auto purchases. In the case of home purchases, if the buyer has found a fantastic bargain, they may lose it because they are unable to get quick financing.
- The method to correct credit errors is not just time-instensive, sometimes the credit bureaus will not correct error no matter how much evidence you send them. This is because all disputes are computerized. Most of the time the credit bureaus have not even contacted the people who are mistakenly putting harmful information on your credit report. 1
- Bickering and competition between the main personal credit bureaus has resulted in multiple scoring systems. Fair Isaac’s FICO score is the one most used by lenders. Unfortunately, the credit bureaus most known to the public, Experian, TransUnion and Equifax, use the VantageScore system which has a different credit score range and criteria than the FICO score. This can confuse the consumer and often lead to assumptions that their credit scores are better or worse than the reality.
- Credit scores are now used to determine national security risks, insurance premiums and employment desirability. Many people think credit is unrelated to these other areas of a person’s life and is not fair reflection.
In addition to these criticisms, it’s impossible for a consumer to know exactly what will make his or her score go up or down. Fair Isaac and the big 3 credit bureaus have not released the exact details of what goes into their scoring model. Only general guidelines have been given out. Here is a little cheat sheet on the credit score general guidelines.
Now that you’ve read both arguments for and against, what is your opinion? Is the scoring system good or bad? Tell us by leaving a comment!
1 Testimony Before Subcommittee on Financial Institutions And Consumer Credit of the Committee on Financial Services.
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The last 2 articles regarding the fairness of the credit scoring business is some of the best information I have seen on this site. As far as it being a good thing, there has to be some sort of standardization so people have something they can measure themselves against. It would also be chaotic for creditors to have to make their own judgments about a person’s credit without having a yardstick to measure by. Talk about law suits!!
On the other hand, I agree that 7 years (and up to 10) is a very long time to penalize a person for a negative action. It is also true that once something has been corrected, it does take a long time for this to show up on the reports and in the digital age we live in, there’s no reason for this.
So far, I have never seen a law, or a system, that is completely fair or unfair. What people need is the education to know how financing works and learn how best to make it work for them. It is this lack of education that has so many people paying way too much for things and missing the opportunities they might otherwise have. This country has made credit too easy, pushed the idea that we are entitled to whatever we want, and have hidden the real cost of this lifestyle. Although not rocket science, it has been our experience that most people we work with don’t realize how big the impact of mismanaged credit has on their lives. Once they learn this, it is now up to them take control of their credit and to live within the lifestyle they can afford.
With regards to the point that credit bureaus will not help with error correction, it seems that the credit bureaus are setting themselves up for a lawsuit. If they claim that they have the ability to dispute, but it is basically useless, that sounds like fraud.
I have disputed many times, but I have never succeeded. I ultimately had to write a demand letter to the creditors to fix the problems. It should not be this way.