One of my readers, Ulysses, was just talking about this (see comment here). With so many card issuers slashing credit limits and closing accounts, consumers and others are starting to wonder if credit scores are keeping up with reality. From USA Today:Bank officials say they’re aware of growing concerns about the effects credit-line reductions and account closures are having on credit scores. But as the economy worsens, they say, more consumers are struggling, so it’s only natural that institutions take steps to reduce risk before borrowers default.Bank officials also say they have no control over credit score calculations — and, like consumers, they don’t know exactly how such scores are determined.”It’s tough to connect any one action (by the lender) to consumers’ credit score,” says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents large banks.Even so, banks are concerned enough about the issue that they’ve asked Fair Isaac, the creator of the widely used FICO score, to study whether — and to what extent — their tightening of credit affects scores. Fair Isaac plans to complete its preliminary study in the next few weeks.The cycle of one bank’s actions potentially affecting a consumer’s credit score and leading to other banks taking similar steps is troubling, says Sen. Chris Dodd, D-Conn. “Banks can only stay in business if they’ve got creditworthy customers. If you’re destroying people’s credit ratings … then you’ve got a customer base that can’t afford your products.”The problem, he says, should provide impetus for “future examination of how credit scores are determined.”Tom Quinn, vice president of scoring at Fair Isaac, says he believes credit scores remain effective in predicting the likelihood consumers will repay their bills.”The challenge is that we haven’t had a recession like this since the Great Depression, and we didn’t have credit scores back then,” he says. “We haven’t really had an opportunity to see” what will happen with credit scores in such an environment.Seth J. Chandler, a law professor at the University of Houston, says although credit scores are “incredibly powerful, lenders might start to revise the importance they put on (them) if they no longer reflect reality.”It will be interesting to see what Fair Isaac, the company that created the FICO score, comes up with when it releases its findings in a few weeks.By the way, I got a chuckle out of the banking industry’s message: we don’t understand credit scores, either. Sure it doesn’t.
Leave a Reply