I don’t particularly care for the current reliance on FICO (or credit) scores. I don’t have a problem with detailed credit reports, but I do have a problem with tying someone’s creditworthiness to “one” number. Everyone seems to tout the importance of having a good score, but no one seems to be speaking up about the downsides of their current usage, so I thought I would. Here are my beefs:

  1. Credit scores are over emphasized. Not since the SAT can I think of one number that people worry and obsess about so much. While I understand the importance of assigning a numerical value to credit history, I don’t think that FICO scores should play the role that they do in today’s lending industry. I know that lending standards, especially for housing are tightening, but if you have an excellent score you can still walk into lending institutions and get a 0-down, undocumented (income) home loan. Previous responsibility says nothing about someone’s ability to pay any cost. If you have a 60k/year salary, no significant assets and no rich old aunts who really like you, you are probably going to be hard pressed to pay a 500k mortgage, even at a fixed rate of 4%. You just can’t afford it. And the fact that you pay diligently pay on your Tahoe and your MasterCard doesn’t mean that you can afford a half-million dollar home.

  1. Credit scores are easy to manipulate. How many articles or posts have you read about improving your credit score? There are even places where you pay to have your score boosted (these are technically legal but they are in a very grey area). Or you could forgo getting a stranger to help you and ask someone in your family to add you as an authorized user on their card, so you can piggyback off of their good credit. I’m sorry, but I don’t see how parents making on-time payments for years, should benefit their children. This to me is the equivalent of having your parents “finish” your science project the night before, because you didn’t put any effort into it. Your credit score should reflect your credit history; once we start using the efforts of others the true score loses a lot of its merit.

  1. Credit scores penalize debt reduction and encourage financial baggage. This whole don’t close an old account business is poppycock as far as I am concern. If I don’t use a credit card, I shouldn’t have to keep it around because it helps make my debt to credit limit ratio look better. In the age of identify theft the fact that this sort of practice is considered beneficial is truly alarming. And really how does an unused credit card signal to a lender that I am a better risk for a car or a mortgage? Seriously. How?

  1. Credit scores are used for other areas that have nothing to do with being a credit risk. I personally think that credit scores should have as much bearing on car insurance rates as driving records have on Visa applications. I know that people think that it’s so great that they have lower car insurance rates because they have good credit scores. But I ask you this, why should someone who carries no debt, and hence has a lower credit score, not have the same rate as someone who has debt, if all else is equal?

I believe our over-reliance on credit scores in the past few years is part of the reason that we are experiencing so many financial woes today. This couple is a wonderful example of what’s wrong with the high credit score mindset:

When they first bought their house, they were a single income family with two small children. As time went on they had to replace both their cars and had two more children.

“We would pull out as much as we possibly could (when we refinanced) to pay down credit card bills. We were using our credit cards to pay the bills. They give you those little checks in the mail and so I used those to pay the mortgage,” says Lisa. She also points out that she and her husband were always careful to pay bills on time so as to maintain high credit scores. “We were neurotic about paying our bills on time.”

They think they refinanced about six times. They had one late payment and the rates on all of their credit cards (> $60k) went up and broke the camel’s back.

“I had no more room on my credit cards. We basically could not make any more payments on the mortgage. We had to fight just to keep the electric on and gas on,” says Lisa. “Never in a million years would I have imagined myself getting into a foreclosure and filing for bankruptcy. You never would’ve thought this could happen, having had a 700-plus FICO score.”

One of the first questions I ask myself when I see stories like this (and there are plenty more where this one came from) is, how were they even able to dig such a big hole? How did they keep refinancing? There is nothing in the article to suggest that he started earning more, or she get a job. There were clearly red flags here, but their high FICO score was key to green lighting them through this process. I have some thoughts on how to improve the use of credit scores but I won’t go into detail now (this post is plenty long as-is). However, I will say that I feel, and I think the market will clearly indicate, that a FICO score is but one tool in evaluating appropriate credit limits/products for individuals/couples. Hat-tip to The HBB for the story link.