Credit Scores: The Real Deal?
On June 30th Bloomberg ran an article called "FICO Scores Show Flaws as U.S. Banks Cut Credit Lines." The article sufficiently bashes the credit score giant and their core product by pointing out that consumer credit scores are lowered when credit card issuers lower credit limits. They even take a quote from a consumer advocate who calls the FICO score "...the worst system around." Clearly this was a hatchet job with little design on a balanced story on the subject.
Rather than waiting for another major outlet to publish a "MainStreet" style counterpunch, I've decided that I've got FICO's back on this one.
Now in the spirit of full disclosure, please remember, I spent seven fun-filled years getting paychecks from the boys in propeller hats. The Bloomy article does a fairly good job of screaming; "The sky is falling" from Chicken Little fame. Where is fails miserably is that it doesn't take on any opinions from a truly neutral 3rd party who understands credit scoring.
Bloomberg does interview several parties from FICO but you have to keep in mind that FICO's public comments are going to be tempered because, among other things, they don't want to throw their partners or customers under the bus. Their comments are going to be as neutral as Switzerland. Mine, on the other hand, will be based on reality and since I am beholden to no one, will be a little more valuable to the subject than, "it's the worst system around."
Credit limit reductions can cause a consumer's score to go down. That's completely true. But blaming FICO or calling this a "flaw" in the system is a joke. Here's why...
- A lower limit can cause a consumer's revolving utilization to increase. This can lead to a lower credit score. But the decrease in credit score may very well be not only justified but also statistically valid. As a consumer's available credit decreases so should their risk increase, yes? Less capacity, less access to capital in an emergency equals more risk to a lender. The article makes no attempt to investigate the question.
- Are the lower scores any less predictive than the higher scores? The article, again, offers no evidence that the lower scores paint a misrepresentative picture of consumer credit risk. Remember, credit scores are not a board game for consumers who want to try and get as high as they can. It's a tool for lenders and if lenders are able to fairly judge a consumer's credit risk with the different, albeit lower, scores then so be it. If consumers don't like that then they should pay off their credit card debt or open a new credit card, both which will serve to increase their scores.
- Does the lower credit limit and lower credit score paint a more accurate picture of the consumer's credit risk? This fairly important (sic) topic was missed, swing and a miss, by Bloomberg. In today's environment can anyone honesty say that they're a BETTER credit risk than they were 24 months ago? I don't think so. I'm surely a higher risk even though I'm gamefully employed and never revolve a balance. It's the nature of the credit crunch beast.
So, Bloomberg, the next time you want to shock and awe your readers please at the very least offer them something more than 2 consumers, a congressman, 3 consumer advocates and a guy who, at best, knows how to spell "credit score" while he proclaims that FICO's market dominance is due to Fannie and Freddie, which seems to ignore the fact that FICO had as much, if not more, market share prior to the GSE's adoption of FICO scoring in the late 90's. Offer some balance. Offer some logic. Offer some truth.
John Ulzheimer is a nationally recognized credit expert, president of Consumer Education for Credit.com and contributor to On The Money. Learn more about him at CreditExpertWitness.com.