We’d like to advocate for a reconfiguration of how credit scores are calculated. While we’ve always questioned how credit scores are calculated, this has been more on my mind recently with the financial crises as it is.
Currently the system for determining credit scores has a few things wrong with it:
1) It relies on one having to have a credit card – if you buck the system like James, and choose not to have a credit card, this hurts your credit score.
2) If you do have debt, then the answer to that is to have an even larger debt limit, to keep things in proportion. This is counter intuitive, as if one has a lot of debt you would then like to limit this exposure by not giving them access to even greater credit limits.
3) It requires that you keep open old cards that you don’t even use, just to keep you credit history established for longer.
4) It does not reflect at all whether or not you can pay back your debt.
5) The current credit score system is established by a private entities who are biased in favor of credit and banking institutions.
We believe that the credit rating system would be much better off to adopt the following changes:
A) Be based on whether or not you can actually afford to pay back; wouldn’t be able to sink themselves into a debt hole before they even have a pay check. This would be done on a debt to assets/income ratio, similar to the bottom line of a business.
B) It would not rely on one having to have a credit card, but rather on if you pay your bills (including credit cards).
C) It would factor in your reliability to pay your bills on time, based on past behavior; this would be weighted as more important than what your current income is. This is based on the presumption that a lender would rather see that you make less money and still pay on time, then make more money and be a delinquent payer. Thus, you wouldn’t be penalized for making less, but rather for not paying. Obviously sometimes these go hand in hand, but that is part of the equation for whether you want to lend out money to someone.
D) It should be regulated by a non-profit consumer
watch guard organization with appropriate privacy safe guards to protect citizens. Individuals would also have the ability to authorize who can access their credit scores.
For example, when we recently rented out our investment property, at the end of the day it was most important to know that the renter could feasibly pay the rent at the end of the month. Therefore, when we were looking at two candidates, one with $30k in salary the other with nearly triple that, the obvious choice was the tenant who would be more likely to pay us on time.
In our minds, this change would help to eliminate the necessity to rely on the credit card industry. It would mean that someone could more freely choose to have a credit card, rather than being forced into doing so to maintain a good credit scores.
Above anything else, credit worthiness should be based on whether or not you can pay back that debt. By instituting these changes, consumers would be rewarded for saving and paying back on time, and ultimately living frugal or within their means. With the current economy as it is, this would create balance in a system that has otherwise tipped off into the deep end. Let’s take this as an opportunity to put things back on track.
Sorry FICO, we’d like to see the end of you.
Happy Saving,
Miel
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