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Credit Scores Are Not Reliable, Industry Experts Say

By Brian Anderson
Published: Sunday, August 1st, 2010

Business men at work going through a documentCredit scores summarize a customer’s credit background. These are based on the credit report and are computed through a secret formula. Score creators, such as Fair Isaac Corporation, would provide their basis for computation through an outline of weighted components from the credit reports. FICO scores, for instance have five weighted components while VintageScores have six.

Customers are aware of the components and work hard to somehow improve their credit history. Later on, they pay for access to their credit score and they see a number. Credit scores are supposed to measure creditworthiness but, according to customers’ viewpoint, the scores don’t actually tell a story. The credit reports can talk about the background, but how did the words make up such number?

In an article from Time, it was stated that many lenders don’t feel confident with the scores. With the changes in the credit industry and behavior of the people composing it, reliance on credit scores is not enough or is ineffective. Lenders and banks need to look beyond those numbers and take a look at additional information. Mike Mondelli of L2C has stated that they have used historical phone payments and other similar records to review the customer’s credit background. Mondelli claims that the scores have the ability to determine who the best is and who the worst is by taking the scores of both ends of the range. But the scores in the middle can’t quite provide much information about the customer’s creditworthiness.

Loan or credit applications of customers with low or no scores are more likely to be declined or to be more expensive. While those with the high scores get to have lower interest rates and higher credit limits. The logic is excusable but there are other factors that must be considered to make the equation perfect. Inaccuracies and time lags can affect the scores. If a customer sees an error on his or her report, the error correction isn’t that quick. It could take weeks to update the reports meaning the errors would remain for weeks which could cause delays. Another criticism is that the multiplicity of credit scores available makes some customers confused. The question, “which is which”, remains unanswered. For instance, two persons with the same credit behavior go to two different banks and apply for a loan. The chances are both will be denied/approved or just one of them gets denied/approved. If both gets the denial or approval, that is very logical since the two have the same credit behavior. But if one gets the approval and the other gets the denial, there might be an inconsistency. The lenders may be using different credit scores. This situation can become derogatory to average to low credit scorers.

Though the scores can affect customers’ future credit, customers must try their best to create a good credit background. Obsessing the scores doesn’t build creditworthiness but making timely payments, observing proper financial management and maintaining reliable credit reports do.

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