In the past few months many people are publicly taking the
stance that the FICO scoring system needs to be changed. The claim is that adjustments need to be made
to the existing formula to better reflect the current economic landscape. Most of these people think the system is
outdated and should be changed to lessen the value that is placed on credit
card balances compared to the limit on those cards and that an occasional late payment
or a collection should not have as big of an impact as it currently does. They believe that if these changes were made
that it would increase the average credit score of Americans which would then help
the economy because more people would be able to qualify for things that they
currently are unable to purchase.
All
that sounds like a great idea but there are a few reasons as to why this is
very flawed thinking. The first thing
that needs to be understood is FICO is a company that developed a product to
make money. Their customers are primarily
lenders and banks. Not American
consumers. We do not increase their
profits. Their main asset that makes
their entire business run is the formula that they have created, tested,
analyzed and developed know as the FICO score.
If you owned a very lucrative business and your main customer had no
complaints with your product would you completely change your product for a few
that didn’t like it?
The
next point lost by those waiving the banner for change is, what is the purpose of the FICO score in the first place? If you don’t actually know what the product
is designed to do in the first place, it makes it hard to make an educated
comment that it should just be changed.
The purpose of the FICO score is predict the statistical chance of a
consumer being 90 days late or more in the next 2 years on a loan/credit card obligation. The key word is “predict”. Having
years of data and millions of samples as the foundation for their product evidently
is not enough for some people. If they
change things just too arbitrarily inflate people’s scores all they would do is
make their product less valuable and end up upsetting their main customer base
in the process. It will never happen and
in my opinion there is no need too, the product does what it is supposed to
do. I am not a FICO score apologist, but
in this case the argument made publicly by many is one that is not properly
thought out and being made to the wrong people.
If you really want change, and the basis for change is that more people
need to be able to qualify for loans.
Then the outcry needs to be directed at banks, and more importantly the
credit reporting agencies. The FICO
score is only as good as the data that it has to analyze. The problem isn’t the score; the problem is
the people reporting to the bureaus and the bureaus themselves! Credit bureaus make money by storing and
selling data. Nowhere in that statement
did I say “accurate” data. In dealing
with credit bureaus on a daily basis I do not believe the accuracy of the data
is a very high concern of theirs. If it
was they would do several things differently!
Don’t
hold your breath waiting for people to make FICO tweak their model to better
reflect the current economic challenges, that isn’t going to happen. A better use of your effort would be to
direct it towards the credit bureaus who have sloppy reporting and find as many
ways possible to not really help consumers that have inaccurate or unverifiable
items on their credit report.
