Our present credit rating system is far from perfect. Now, the credit rating industry is angling to make it worse.
Today, lenders use credit ratings to benefit the rich and shake money out of everyone else. But while the game is rigged against middle and lower income people, it’s not entirely unwinnable. Currently, your credit rating reflects how well you manage money, not how much money you have. Obviously, it’s easier to manage money when you’re rich enough to afford to pay your bills without worrying about how you’re going to pay them. While it’s far more difficult for people living paycheck to paycheck, they can play some angles and work the system to their favor.
But the biggest credit rating system is evidently no longer satisfied with seeing well you use your money. They want to know how much money you have to manage.
This week, Fair Isaac Corp. announced plans to introduce a new credit rating system in 2019. Fair Isaac Corp.’s current credit rating system, FICO, has been the standard consumer credit rating system for decades. Starting next year, they’re going to offer a new scoring system, called UltraFICO.
Lenders use FICO as a tool to mitigate the uncertainty of lending. Every loan entails risk. FICO scores are generally accepted as an accurate indicator of how a borrower will act with money. The Fair Isaac Corp. takes data from an individual’s credit history and uses their proprietary predictive analytics to determine a credit rating.
The UltraFICO score adds a rich source of personal finance to the FICO formulation: banking history. With UltraFICO, people agree to give over information from banking statements, including the length of time accounts have been open, frequency of activity and evidence of saving. FICO frames this as good news for consumers, saying it could help younger people, people who otherwise have limited credit history and people who’ve gone through financial hardship.
While this might provide quicker access to credit for those people, giving credit rating agencies access to banking information could be disastrous for them over the long term. By letting FICO see your bank account, you give up your ability to game the system.
Our present credit score system is far from perfect. In fact, it’s kind of awful. Credit card companies and other lenders mine personal data to sort applicants by race and geography, offering lower interest and overall better terms to rural and suburban white applicants than to black and Latino city-dwelling applicants.
Bad credit makes your life difficult. With high interest rates, it’s almost impossible to pay down debt. Bad credit limits your options for housing, transportation and, most maddeningly in light of your need for money to pay down debt, employment. Landlords check credit before offering leases and banks check credit to set mortgages. Bad credit jacks up auto insurance rates. A prospective boss might check your credit when you apply for a job.
But despite the institutional racism baked into our present credit scoring system, it’s better than the proposed alternative. In our current credit rating system, credit scores are assessed by, in order of importance, payment history, credit utilization, age of accounts and the types of credits you have. If you’re disciplined, you can attain a high credit rating while you have a low income. If you don’t use credit often, you can pay credit cards off every month. Then your credit cards will raise your credit limits, which lowers your credit card utilization. Keep that up for a couple of years in the lead-up to a car loan or a mortgage and you’ll qualify for low rates and save money.
It’s possible to game the system when your income dips or even vanishes altogether. Imagine you’re chugging along on the path to perfect credit but you lose your job. While you’re unemployed, you stay afloat by dipping into your savings and drastically reducing your spending. It isn’t fun but it doesn’t have to destroy your future credit. Under the current system, if you use your credit cards sparingly as possible and continue to pay them off completely each month, you can retain stellar credit even when your income and wealth are low.
If a credit rating system has access to your banking information, even the miserable option of triaging your credit be impossible. They’ll know how much money you have on reserve and change your score accordingly. And when your credit score is low, it can be harder to find a new job if prospective employers run credit checks on applicants.
UltraFICO is an opt-in service for now. But credit agencies are sure to love the new access to personal data it will bring. It seems eminently reasonable to assume they’ll eventually want to make it mandatory.
So please don’t give FICO more information about you. They don’t need it. However, people would greatly benefit from increased access to the information they already have. Thanks to a 2003 law authored by Bernie Sanders, every American can get a free copy of each credit reports every 12 months. (FYI: annualcreditreport.com is the only federally approved credit score site.) Credit reports often contain errors. A 2012 FTC survey found that 20 percent of people who pulled their credit report found an error on the report and that five percent of respondents had errors severe enough to hurt their credit. People often have to work hard over long periods of time to remove bad information from their reports. Letting Americans access credit report information more than once a year could give us a head start on our credit report cleanups.