Are Credit Scores Fair? Is the System Broken?by Tim Manni
We’re “borrowing” this topic from our friend Mitch over at TopFinanceBlog.com. While Mitch’s latest post is titled “Why I Say Credit Scores Are Worthless,” we’re taking a somewhat different approach.
Banks and credit card companies have been jacking up interest rates and fees (if not simply canceling cards) more and more these days — sometimes without warning — as they prepare for the new business landscape that will be created by Congress’ upcoming credit card reform.
On top of battling interest rate increases, the recession has consumers spending less and saving more. To battle both their recessionary struggles and “unfair” credit-card practices, some consumers have canceled their credit cards, or at least have strongly considered it.
I’ve been on this minor rant for a few months against credit scores and some of the things financial advisors have been telling people in regards to making sure their credit scores don’t fall by cutting up credit cards. They’re telling people not to do this, even as banks have been jacking up interest rates on everyone, including people who had these great credit scores.
On Monday, the Federal Reserve proved it, presenting statistics that showed around 50% of all banks had jacked up interest rates on people whose credit scores were good. Around 40% of banks said they were imposing higher fees, and many others mentioned they were raising the credit score limit in deciding who was going to get new credit cards.
We too have suggested that credit card customers not dispose of old or unused credit cards because their credit scores could suffer if they do. From a financial standpoint it makes sense, but is it fair that your credit score will drop if you rid yourself of a credit card?
What about loan mods? In “Loan Modifications Are Hurting Credit Scores” — a post we wrote back in July that received a good deal of reader response — we reported:
Banks, including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., report the loan modifications to credit bureaus. The adjustments can lower credit scores because of the way the FICO formula, the most widely used by U.S. lenders, works.
We’ve done our fair share of criticizing the unintended consequences brought on by government programs. We believe it’s important to examine these negative byproducts since they affect all of us a great deal.
Is it fair that government-instituted programs and legislations, like loan modifications and the new credit card rules, are essentially hurting those they’re designed to help?
Why should programs designed to help American credit card holders and homeowners — who are trying to better their financial situation — harm them for merely taking advantage of them?
Mitch argues that it’s time to change the FICO scoring system. Credit card customers shouldn’t be penalized for cutting themselves off from increasing interest rates, he says.
Do you agree?