Will credit scores matter in 2010?

[Danke]

With so many people and institutions defaulting, how important will credit scores be in a year?

[constitutional]

Probably more than ever as lenders become wary of bad borrowers.

On a second thought, I'm going with "Kludge is a douchebag" just to be safe. :p

[RickyJ]

It won't matter that much because if they restrict lending to only those with good credit scores they won't be lending much. The economy must keep going, therefore the credit will be raised for everyone regardless of your score.

[Thrashertm]

Depends on which side of the fence you sit on. As a borrower that defaults, it won't stop you from receiving loans once you establish good credit down the road. If you are able to maintain good credit during the crisis, I'd think the banks would be competing for your business.

[MrNick]

I think the majority will have bad credit after this mess is over and how can you have a credit society with the majority having bad credit?

[devil21]

I think the majority will have bad credit after this mess is over and how can you have a credit society with the majority having bad credit?

Another step in class warfare.

[Kludge]

Credit scores are for debtors.

[devil21]

Well at least you have a sense of humor Kludge. You just voted "Kludge is a douchebag".

[Kludge]

Well at least you have a sense of humor Kludge. You just voted "Kludge is a douchebag".

No, I wrote "Credit scores are for debtors.", and they are.

But anyway, I take that back, because credit scores are also for lenders.

[devil21]

No, I wrote "Credit scores are for debtors.", and they are.

But anyway, I take that back, because credit scores are also for lenders.

Oh, nevermind. I thought you had a sense of humor. The douchebag vote went up one vote when you posted. Then again, maybe that explains it.

[Mini-Me]

Depends on which side of the fence you sit on. As a borrower that defaults, it won't stop you from receiving loans once you establish good credit down the road. If you are able to maintain good credit during the crisis, I'd think the banks would be competing for your business.

I voted that Kludge is a douchebag, but on second thought, I think Thrashertm's comments are worth reposting.

[misterx]

More than ever. You people are only deluding yourselves. Like it or not, leveraging your good credit is the quickest way to get rich. As availability of credit shrinks, those who qualify will have an even greater advantage.

[UK4Paul]

More than ever. You people are only deluding yourselves. Like it or not, leveraging your good credit is the quickest way to get rich. As availability of credit shrinks, those who qualify will have an even greater advantage.

Isn't that basically what they said in 1929, with all those suckers buying into the stock market on, for the most part, somebody else's money?

[Isaac Bickerstaff]

More than ever. You people are only deluding yourselves. Like it or not, leveraging your good credit is the quickest way to get rich. As availability of credit shrinks, those who qualify will have an even greater advantage.

Yeah, and when debt becomes the problem again, the government will take money from those that didn't go into debt to bail your ass out (again).

[theoakman]

Yeah, and when debt becomes the problem again, the government will take money from those that didn't go into debt to bail your ass out (again).

the problem again? The curve hasn't shifted in 30 years. Debt has been increasing and has been the problem all along.

[WRellim]

You didn't have my option, which was "Credit Scores won't matter AT ALL."

My reason is simple, for MAJOR purchases (like mortgage) what will matter will be whether you have a 20% or larger down-payment (and a history to show how it was saved up or otherwise "sourced").

Other "major" purchases for things -- like car loans -- will either devolve down to where you are getting them from a local bank (which will examine your income/expenses in DETAIL and will mostly care about where you work and how long, how stable the job/business is).

In general, I think the other aspect -- the "credit card" economy will end up being totally thrown in the crapper; with the main reason being that local store will no longer want to give up the 5% or higher chunk that the middleman (CC company) claims from each transaction.

It MAY not happen until a bit further out than 2010 -- it might be 2012 or even 2020. But I sincerely believe that we'll be going back to a "cash" economy (electronic transactions probably will still be present, but the vast majority will be debit rather than credit, and I can forsee that "discounts" will reappear for those versus CC... all it will take is for ONE of the major CC companies to "allow" the vendors to give debit-card customers a discount, and therefore "split the difference" on the fee with the processing company.)**

Or, shop owners could "push" this even without the credit card company approvals -- simply by making it less "convenient" to use credit cards (via a separate checkout lane, additional delays, etc).

Currently (or so I am told by local shop-owners) each CC transaction costs them more than the debit card ones, but they swallow the difference because they don't want to piss off customers (the vast majority of whom buy via credit card).

So... that means it is a "psychological" thing -- and as things get tight, that "attitude" may change (especially if the trend reverses and less people buy with credit cards).

[ArchPaul]

Its a double edge sword.
Banks make money by lending. No money lent, no income from interest.
If a lot of people have bad credit, and they're not willing to lend to them, then
they will not make money.

[newbitech]

I don't see why credit scores have ever mattered. When things were "great" you could get a $250k loan with a 550 FICO. Now that things are crappy, you won't get squat even with a 725 score unless you have the collateral to back it up.

So nah, scores never really weighed that much in the past or present, and they won't matter in the future either. The scam is in the interest rates. That is what has always mattered. And setting rates based on FICO has always been dumb.

[theoakman]

I don't see why credit scores have ever mattered. When things were "great" you could get a $250k loan with a 550 FICO. Now that things are crappy, you won't get squat even with a 725 score unless you have the collateral to back it up.

So nah, scores never really weighed that much in the past or present, and they won't matter in the future either. The scam is in the interest rates. That is what has always mattered. And setting rates based on FICO has always been dumb.

actually, prior to this decade, credit scores were precisely what mattered. This decade was an anomaly. The idea of giving someone with a 550 credit score a loan to buy a large home was considered insanity. What we are seeing is a return to sanity.

[WRellim]

actually, prior to this decade, credit scores were precisely what mattered. This decade was an anomaly. The idea of giving someone with a 550 credit score a loan to buy a large home was considered insanity. What we are seeing is a return to sanity.


Not always.

FICO scores became of utmost importance only since the late 1970's.

Prior to that, it was whether you had a down-payment (for houses & cars) and/or your job stability, family, even your "reputation" mattered (it was KNOWN whether you were a drinker, etc).

Back then you were borrowing from a local banker -- who actually made his money based on whether you repaid the loan or not (i.e. he CARED and actually WANTED you to repay, else he was screwed & if he got screwed too often, he went bankrupt). The "strictness" of bankers still varied -- those who were TOO strict/tight didn't prosper; those who were too liberal/free also tended to fail; the optimizing bankers who knew what risks were appropriate were the ones who expanded their business.

With the whole "securitization" (which was actually preceded on the deposit side by CD's, money-market savings & mutual funds replacing "savings accounts" and thus taking local money OUT of the local economy picture) -- the local banker now made his profits from his "processing charges" and his "origination fees" -- and once he'd resold your mortgage, he couldn't have cared LESS whether you repaid it or not.

Point is that even local "community banks" really just became like private-labeled ATM machines that were remotely linked to the biggest banks and Wall Street; the "local" aspect of it on both the saving and lending sides never talked or worked with each other -- all the money was channeled UP to NYC and then came back DOWN on the other side.

And, having worked in a bank when this transition FIRST started -- in the late 1970's and early 1980's -- I can tell you it wreaked a dramatic change in the internal workings of banks -- as the "old-guys" retired, even the concept that locally saved money COULD be reinvested locally was utterly lost.


The "normal" concept (pre 100% fiat money, but still post Federal Reserve) that was the boring "3/6/3 concept" -- take money in at 3%, lend it at 6%, and on the golf course by 3 pm -- was a LOT more stable (and since the banker did conduct important "business" with others on the LOCAL golf course, well, that was OK -- certainly better for the local community than the Million-dollar Wall Street bonuses and the Cayman Island subsidiaries).

[Feenix566]

It won't matter that much because if they restrict lending to only those with good credit scores they won't be lending much. The economy must keep going, therefore the credit will be raised for everyone regardless of your score.

The economy doesn't need lending to keep going. Bankers need lending to keep going, but the economy does not.


More than ever. You people are only deluding yourselves. Like it or not, leveraging your good credit is the quickest way to get rich. As availability of credit shrinks, those who qualify will have an even greater advantage.

Leveraging your credit doesn't make you rich. It makes you in debt. I agree with the rest of your post, though.


I don't see why credit scores have ever mattered. When things were "great" you could get a $250k loan with a 550 FICO. Now that things are crappy, you won't get squat even with a 725 score unless you have the collateral to back it up.

So nah, scores never really weighed that much in the past or present, and they won't matter in the future either. The scam is in the interest rates. That is what has always mattered. And setting rates based on FICO has always been dumb.

You willing to bet your future on that?

[Feenix566]

No, I wrote "Credit scores are for debtors.", and they are.

But anyway, I take that back, because credit scores are also for lenders.

This is actually quite true. I have great credit, because I don't borrow money. That's also why I don't need great credit, because I don't want to borrow money.

If you add up the payments for a mortgage, you end up paying twice as much as the house is worth. The banks walks away with half the money. It's a very lucrative scam. It's a bad idea for you.

So why does everybody do it? Because the banks are in bed with the politicians. The banks managed to convince the politicians that lending money to everyone is good for society, because it enables people to buy houses. What the bankers never bothered to mention to the politicians is that when you make loans available to everybody, house prices go up. That makes them less affordable, which counteracts the intention of making houses more avialable.

Our government's policy of making mortgage interest tax deductable is a good example of what I'm talking about. It's clear from that policy, and from many others like it, that the politicians are trying to encourage you to borrow money from the banks to buy a house.

If it weren't for policies like that, I doubt very many people would take out mortgages. If you look at the numbers, it just isn't a good idea. You're a lot better off renting and saving, and then buying a house outright. But in that scenario, the banks don't get to take half the money you pay for a house. So, of course, the banks have steered us away from that direction.

This whole bailout has nothing at all to do with helping out the average American consumer. It has everything to do with helping out the bankers. They want to keep us in debt for as much as possible for as long as possible. That's why they've sold us this lie about how good credit is for the economy.

Don't believe 'em.

[newbitech]

You willing to bet your future on that?

why would I gamble with my future based on what some secretive private entrepreneur's algorithm says about my ability to repay a loan at usury rates?

It has been estimated that some 75% of credit reports contain inaccurate or otherwise false information. Its a silly numbers game that has a clever marketing ploy behind it designed to capitalize on the poor accounting skills of business owners that offer a product that their customers either can't afford or aren't willing to pay for with real money.

It's a scam that has grown up around the practice of giving away things for free to increase sales figures now, for a promise of success in the future. When this promise goes unfulfilled for ANY reason, including government theft, loss of life, loss of economically viable jobs, or corporate greed, then the opportunistic vultures swoop in to claim the carcasses in hopes of reanimating the system of death for yet another round of selling fake products for fake money.

I'd like to know how the algorithm calculates things like deflated currencies, inflated prices, job loss due to economic collapse, government hiking up taxes, etc etc...

I think the way the scores are calculated are bogus. Based off of bogus information, weighed in the favor of the lenders to make it appear like a borrower is of more risk, thus allowing lender the justification to charge more. Its all a bunch of crap in the "good times" and utterly useless in the bad.

The only way to gauge trust and ability to repay is know the person you are lending to and borrowing from. If business need to rely on these bogus algorithms backed by fake data to make sales and profit, then there is something wrong with their business model. Either they need to lower prices by lowering production cost, by coming up with a better way to make the product, OR they need to be willing to take it on the chops when economic hardship hits their anonymous "credit worthy" customers who can't pay for their free stuff they got last year.

Make better contracts that acknowledge hardships occur and conduct your accounting accordingly.

[DamianTV]

I think Banks, who have too much power already, are going to put more weight on employers to do Credit Checks for employment, like insurance companies already do with drug tests. They are going to try to make as many people fail as possible. It will become more important, but not because it is more important, but because banks are going to flex their financial muscles.

[Politicallore]

Probably more than ever as lenders become wary of bad borrowers.

:p

That is the scary part... It really is...

The scores themselves, are so easily manipulated... it is scary.

[devil21]

This is actually quite true. I have great credit, because I don't borrow money. That's also why I don't need great credit, because I don't want to borrow money.

Not using credit doesn't mean you have "great credit". In fact, the FICO scoring model requires credit usage to move your score into the higher tiers. The more credit you use and successfully pay back the higher your score. Someone that barely, if ever, uses credit will have a lower score than someone who uses credit responsibly. Someone that uses no credit will have no score whatsoever. I don't know your personal situation so that is more general than specific to you, just pointing it out.

[WRellim]

Not using credit doesn't mean you have "great credit". In fact, the FICO scoring model requires credit usage to move your score into the higher tiers. The more credit you use and successfully pay back the higher your score. Someone that barely, if ever, uses credit will have a lower score than someone who uses credit responsibly. Someone that uses no credit will have no score whatsoever. I don't know your personal situation so that is more general than specific to you, just pointing it out.

With notable exceptions.

There are two types of people who "don't use credit":

1) the vast majority who have nothing and simply spend everything as they get their hands on it (i.e. money burns a hole in their pocket, and they live "paycheck to paycheck")

2) the minority who are frugal, don't buy things to impress others, abhor the very idea of debt, and instead SAVE.

This latter category really doesn't need to care about their credit score -- when they go to buy a house they have 20% (or far higher) as a downpayment, and additional savings on the side as well. Bankers will loan to them, regardless of their "lack" of a credit score.

In fact, currently, the latter are among the few who can easily be preapproved for mortgages, etc.


I think Banks, who have too much power already, are going to put more weight on employers to do Credit Checks for employment, like insurance companies already do with drug tests. They are going to try to make as many people fail as possible. It will become more important, but not because it is more important, but because banks are going to flex their financial muscles.

It depends -- with the current (and rapidly failing) "global securitized" banking model -- they will still be highly dependant on that FICO score thingee (more as an excuse than anything else: "How was I to know the guy would default? He had an excellent FICO score!" The answer SHOULD be: "If you were any good at your job, you WOULD have known.")

But when we (eventually) return to a local-banking model (where the loan is made using local depositors funds and the bank itself "holds" the mortgage paper and receives the benefit from the interest), then the credit scores will be looked at as merely ONE part of the equation (and a highly questionable, faulty, error-prone part at that).

For the "local bankers" far more important will be the "traditional" data -- the person's saving history, personal reputation, employment history, history with the bank itself, etc. (And a high FICO score may indicate the fact that the person is a "debtaholic" -- i.e. a "regular drinker" who just hasn't gotten a DWI yet because they always call a cab.)

As to making "as many people fail as possible" -- that will (in the end) be counterproductive. Like all forms of "grading" it will end up being done on a "curve". A single firm may indeed hire only people with "perfect 4.0 grade averages" -- but there are not enough of those people to go around for EVERY firm to do so (all that would do would be to falsely bid up the salaries of those individuals).

End point would mean that if ALL bankers were only willing to lend to the few people left standing with high FICO scores -- then the competition to make loans to those people would mean that they could get better deals and would be less profitable; so other loans would still have to be made to people with lower scores. And if they falsely drive down the FICO scores of 90% of the people, it's use in distinguishing the "better" from the "average" from the "worst" would render it useless.

(It would the the equivalent of a teacher handing out a small number of "A's" and giving everyone else an "F" with no "B's C's or D's" -- the teacher's own ability to teach would begin to be questioned, after all if 90% of his students are utter failures, is that not obvious proof that he is a poor/incompetent teacher? The 10% who actually understood the subject were probably capable of learning it without his efforts -- just give them the book & save the salary -- as the teacher is superfluous to the result.)

FICO scores cost banks money to use -- if the scores do not HELP the banks to distinguish between one potential borrower and another -- then the value of the tool disappears entirely, or is greatly diminished. (BTW, I actually think this is what WILL happen, FICO will probably still be used, but it will have much less value.)


If it weren't for policies like that, I doubt very many people would take out mortgages. If you look at the numbers, it just isn't a good idea. You're a lot better off renting and saving, and then buying a house outright. But in that scenario, the banks don't get to take half the money you pay for a house. So, of course, the banks have steered us away from that direction.

Actually that is very situation dependent equation.

Though I agree wholeheartedly that the "mortgage interest deduction" is really nothing more than a "banker/realtor subsidy" that drives UP the price of homes (far beyond what they are actually worth).

BUT, buying a home instead of renting CAN be a net positive for some people's financial situations (though definitely NOT for everyone). Whether it is depends on several underlying assumptions/conditions, of course:
1) that the person is the type to (and intend on continuing) staying in one location for a significant number of years (the chief point that is forgotten by most is that a RE transaction typically has high "expenses" that are 10% or more of the asset price -- between realtor commissions, bank & title fees and assorted other closing costs -- so if you buy/sell 3 houses in 10 years, you've paid 10% 3 times over, each sale cost being "amortized" over an average of about 3 years {+3% per year in addition to the interest on the loan... yikes!}, if you live in a house for 10 years or longer, you've paid 1 time and "amortized" that expense over the 10 year time span {1% a year}; and if you live in it for longer... the cost become insignificant;)

2) that they bought the house when the prices are NOT overinflated;

3) that they can actually afford the house they bought (i.e. relative to their income -- and this means utilities, maintenance, as well as mortgage payments);

4) that they're the frugal/saver type (and therefore have +20% down-payment saved over the course of time, and once they buy the house, they pay off the mortgage ASAP ...say within 10 years or less; thus minimizing the costs of the loan in multiple ways.)

5) that they buy a house designed for "minimal major maintenance" (i.e. steeper pitch on roof = longer lasting shingles -- versus -- flat-roof = nightmares, etc.)

6) that they can handle (at least) a significant amount of the minor AND major maintenance themselves (i.e. they're a bit of a "handyman" -- even better if they can do nearly everything, then it comes down to cost of materials + a bit of time).
In the case of someone who fits ALL of those criteria, then by renting (the same apartment/house) they would be simply "throwing away money" -- versus buying a home and getting something (equity) in return.

Plus, the renter tends to be missing ALL of the non-quantifiable rights that a homeowner has of changing the house when/how they want (whether it be paint, or additions, decks, etc.) While seemingly minor, these can be important to one's "satisfaction" with life (especially for those who have hobbies and want a workshop/place to "tinker" or do side jobs, etc -- these tend to be virtually impossible in a rental situation).

But back to the financial side -- how well the "equity" works as an "investment" depends entirely on WHEN they end up selling. If sold into an UP market, then the returns can be substantial; if sold into a DOWN market, then returns can be poor/abysmal/negative. (But the same can be said of ALL investments: stocks, bonds, etc).

Its really the same as running a business.

Many businesses are run on an "ever expanding" model -- they leverage everything to the maximum possible (and basically own "nothing"; what little they DO have for unleveraged assets are worth far less, at current market rates, than book value might imply) -- which works fine while the economy is expanding in the same way.

But just like the homeowner who ends up "underwater" and unemployed -- the same happens with businesses run in that fashion (see GM, etc). They cannot endure the "storm" and tend to collapse pretty dramatically when it hits (to everyone's "shock" though there should be nothing "shocking" or even "surprising" about it).

If you build your house (or business) on sand in a flood plain... you shouldn't be surprised that the sands "shift" and your house disappears along with the ground when the (inevitable) hurricane/flood/tsunami hits.

[cbc58]

has anyone ever wondered (like me) why there are 3 credit bureaus and they are now public companies?

why do we need 3? one should be sufficient.

[devil21]

has anyone ever wondered (like me) why there are 3 credit bureaus and they are now public companies?

why do we need 3? one should be sufficient.

Probably because one single source of credit information would be a monopoly. Regardless, all 3 bureaus are nothing but crooks and fronts for the creditors and debt collectors. They do NOT work for the citizens, they work for the banks. There's a reason why 85% of credit reports have errors on them and those errors are never in your favor.