OK, I've found my latest issue, and the more I learn about it, the angrier I'm becoming. Credit scoring is increasingly becoming the altar at which all sorts of business and government entities worship. The implications are frightening. I've worked for banks and credit companies off and on for several years, and the thing that amazes me is that no one- even people in the financial services industry- can explain how credit scores work. It's like something out of a Kafka novel- "We can't tell you what the problem is, or how to fix it; we just know that your credit score isn't high enough."
There is something profoundly f****d up about a system where this could be true:
So handling your financial affairs responsibly and trying to reduce your debt might NOT be a good thing??
What is truly frightening is the potential for abuse that exists with the existence of credit scoring. Your credit score can effect whether or not you can get insurance, what your insurance rates are, whether or not you get a job, and at some point it may even impact whether or not you are able to board a commerical airliner.
The way it works is really pretty simple: your credit history is evaluated based on specific criteria and assigned a number from 300 to 850 (in this case, more is always better). Here's the sick thing, though: no one except the actuaries who developed the algorithms can really explain exactly how credit scoring works. Fair-Isaac, the leader in the credit scoring market, treats anything that can be even remotely interpreted as proprietary information as a state secret. In the meantime, the Almighty Number, which in some cases can seem as if it could have just as easily been spit out by a random number generator, literally controls your financial future.
Given the importance that one's credit score has attained in the financial cosmos, you'd think that ensuring accuracy of such scoring would be a priority. Well, you'd be dead wrong. It's no secret that the credit reports of most Americans are riddled with errors. Well, guess what? Those same error-filled reports are used to calculate credit scores, and credit reporting agencies have little incentive to expend much energy in correcting mistakes.
Another problem with credit scoring is the way in which payment behavior is interpreted. You would think that paying things off early, making more than the monthly minimum payments, and maintaining a low debt to income ration would contribute to a better credit score. Well, yes, but not necessarily. Ask a banker what behaviors will positively effect your credit scores. If they go beyond broad generalities, the odds are good that they're blowing smoke at you, because most bankers simply do not adequately understand how credit scores are calculated.
Don't get me wrong. I'm not about denying financial institutions the tools and opportunity to reduce their risk. Limiting risk is, after all, how these institutions make money. That being said, wouldn't some transparency as to how criedit scores are calculated be a good thing? Particularly when you consider the increasingly oppressive role that this seemingly arbitrary number is assuming in all of our lives? Right; but if you did get someone to explain it to you, they'd have to kill you afterwards.
