Consumer Law

Joe Nocera's Terrific Report on the Tyranny of Credit Scores

By Kemnitzer, Anderson, Barron, Ogilvie & Brewer

NY Time' columinist Joe Nocera's report on the tyranny of credit scores is right on the money. He points out that Fannie, Freddie and the banks that write mortgages depending on one thing--the applicant's credit score. Nocera gives examples of perfectly credit-worthy consumes whose credit scores are low for odd and irrelevant reasons. For example, a consumer's "credit utilization may be high on only one credit card. Using FICO's formula, this adversely affects the credit score,

But Nocera notes that it is not FICO that comes up with a borrower?s score ? it just sells the algorithms. The three national credit bureaus, TransUnion, Equifax and Experian, gather input about the prospective borrower?s lending history from various lenders like credit card companies and auto dealers, plug them into a formula and derive a credit score.

Nocera writes that you would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. But there are no rules. "Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don?t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

He adds that FICO scores are not even the best predictor whether someone will default. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores according to the chief executive of Primary Residential Mortgage, a leading mortgage lender.

Moreover, lenders don?t take into account the many, mistakes that are found in credit reports. He mentions a number of errors on his own credit reports. TransUnion is reporting that Nocera works for Rite Aid!

Ed Mierzwinski, who is with PIRG in Washington, D.C., tracks Fair Credit issues. His equally interesting report on credit scores and some pending legislation is below the fold.

Full post as published by California Credit Law Blog on July 25, 2010 (boomark / email).