A few days ago the creator of the most famous consumer ‘credit score’ in the United States announced a major overhaul in how it rates borrowers.
Consumers live and die by this ‘FICO score’. A high FICO score means that it’s easy to obtain loans at lower interest rates.
And a bad FICO score (in theory) means that you have a history of not paying your debts… hence making it difficult to obtain loans.
Well it turns out there are tens of millions of people in the US who either don’t have FICO scores at all (i.e. NO credit history), or they have BAD credit.
So FICO decided that they would reinvent the way they calculate the scores– giving a big boost to people with bad credit.
Virtually overnight, people who have a history of not paying their bills will immediately be deemed creditworthy.
And poof… they’ll have access to more debt than ever before.
No offense, but what a bunch of idiots.
This company is deliberately lowering its standards and pretending that people with a terrible credit history are actually top quality borrowers.
Gee where have we seen this before?
Oh that’s right… just before the massive financial crisis ten years ago! It’s genius!
It wasn’t even that long ago during the housing boom in the early 2000s that banks were doing EXACTLY the same thing– deliberately lowering their lending standards and providing loans (WITH NO MONEY DOWN) to borrowers with bad credit.
Everyone was in on it. The big ratings agencies like S&P and Moody’s all played along.
Even the federal government gave its seal of approval to this ridiculous charade.
But eventually the bubble burst. Interest rates started rising and the borrowers could no longer pay.
Housing prices tanked. Banks lost billions. The stock market plummetted. The economy went into a tailspin.
It unraveled so quickly… and it all started with a system that churned out far too much debt, far too easily, to borrowers who had no hope of paying it back.
And that’s precisely what we’re seeing now.
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When I paid off my 30 year mortgage a few years ago, my score took a 200 point plunge! It came back soon enough, but when I finally paid off my 2nd equity loan 3 months ago, it took a 75 point plunge!
ReplyDeleteOne would thing paying off all your debt would be considered a good reason to loan you more money, not a bad thing.
I just don't get it...
I'm with you. Never understood why your score would drop when you made your payments on time and then paid it off. My credit score is higher than my husband's. We are in the excellent category. Not bragging - it's just my husband pays all the bills and I just spend (as he would say). Not newly weds so he didn't have bad credit before we met - nothing like that. So why would they give me a higher score.
ReplyDeleteWhat does this do to companies especially in Salisbury that fix your credit for a fee (you know who I'm talking about) so you can get a loan. You do know they exist. It is only temporary. But it will cost you. It is also legal. Called a dispute. Removed from credit report until dispute is resolved. In the mean time you get your loan. Sounds like a racket to me.
ReplyDelete