Does anyone else think that credit scores helped cause the financial crisis? (loan, debt)

[subsound]

Credit scores are only part of the equation. Many lenders basically just let people fill in whatever income they felt like in the fields without bothering to find out if it was correct just to find a payment they could afford.

For everyone involved it didn't matter if the house valuation was true, didn't matter what the interest rate would be in 5 years, didn't matter what the market would be in 5 years. People were blithely ignoring everything that came to qualifying people for credit in their ability to repay it, and consumers ignored what was being said in contrary at the same time.

[sterlinggirl]

Originally Posted by drjones96

My credit scores say I'm excellent.

My payment history says I'm reliable and responsible.

But the reality is I wouldn't rate myself that high!

I think the last few years credit scores have been higher than they should have been....and far too many banks have been lending way more money than they should have...and raised credit limits way higher than they should have because of these high scores.

More attention should have been paid to the real data on the borrower.

I don't see how FICO is that much different than the bond rating agencies. They're supposedly independent and there to give an objective analysis to investors...but we've already seen how they can be influenced to serve the needs of one party over the other.

When banks need credit scores to rise, they will. Likewise, scores will drop when the powers that be decide its time for them to do so.

[chet everett]

There are MAJOR differences in how bond ratings firms operate and how / way credit scored like FICO can into being.

The folks that indirectly set the prices doe bond offerings as the Investment Bank, as well issuing firm itself can (and do) pay the rating agencies for their work. There are also prohibitions against other firms entering these areas. Both these factors are quite different than what exists on the consumer side.

The work that consumer credit scores come from is NEVER supplied by the consumer, and always paid for by the lender. Any firm can attempt to provide consumer scoring , and there are no real government enforced restrictions.

[ddmhughes]

Thanks everyone for your answers! I really learned a lot about how credit scores work. They affect so many aspects of life now a days it is incredible to me that they are unregulated and practically no “real” attempt has been made to educate people how they work. [/SIZE]

Do you think they are fair? I used to work with this woman who was a complete basket case. She was a single mother but she had a huge house, a boat, a brand new Jeep and was vacationing in Mexico every year. She was putting it all on credit! I heard her talking to another coworker of mine one day who was thinking about declaring Bankruptcy. Her exact words were “I did it before its not bad, just embarrassing for a few years but you can get credit cards your credit score will slowly go up and in about 5 years it will be like it never happened.” How can they trust her with that much debt if she declared Bankruptcy before? I know she was really in a lot of debt because she would wine about her problems all day at work

It seems even like being late on one payment really wallops your score. A $40 payment that was 30 days late will be on a credit report for seven years! A bankruptcy will also only be on for 7 years! A bankruptcy is a lot worse then a late payment.

[thisguy]

there are many root causes but yes
so much of the financial instruments of mass destruction were based on "models", i.e. FICO score this = ability to pay that.

You can have a good FICO score but if you lose your job it means nothing.

But on a scale of y1 to 10 this is like a 4 in importance - stupid loans thrown in every direction and Americans willing to pay any price for the home they deserved (or the ability to daytrade homes!) was a much larger issue. Unfortunately we are doing it again via FHA.

[John23]

As a Gen y'er, I don't trust any of it. Don't trust credit scores. Don't trust the mightly credit bureau's. Don't trust the banks to tell you the truth.

I think credit scores have already been used as a stealth way of tracking you and what you do, or what you're able to do (i.e. being used if you apply for a job). Analogous to how the use of social security numbers has changed.

Social security numbers were never intended to be used as a form of ID. But the "powers that be" didn't like that I guess, and needed a way to track people.

-Look how slowly this credit scoring system has changed in the last few years. Most people are worried about their jobs, healthcare, making rent, making their student loan payments! On top of this era of fear from 9/11. Make people fearful and distracted, so they don't know how they're being tracked, or how they're being manipulated.

Then it slowly changes from one formula to another. Or one bureau's special formula to 3. Or get your free credit report.

-I think the rules are extremely arbitrary. For example, why don't rent payments count to building a credit score? Or utilities? I think the models have been used in part to keep poor people down. Exclude key payments so they don't have higher credit scores (and thus lower interest rates).

Credit scores have been used as another tool of distraction (besides octo mom and balloon boy) so people *don't* pay attention to moron bankers that gambled the house away. Or they don't protest outside of the whitehouse, or protest on wall street.

[ddmhughes]

Originally Posted by John23

As a Gen y'er, I don't trust any of it. Don't trust credit scores. Don't trust the mightly credit bureau's. Don't trust the banks to tell you the truth.

I think credit scores have already been used as a stealth way of tracking you and what you do, or what you're able to do (i.e. being used if you apply for a job). Analogous to how the use of social security numbers has changed.

Social security numbers were never intended to be used as a form of ID. But the "powers that be" didn't like that I guess, and needed a way to track people.

-Look how slowly this credit scoring system has changed in the last few years. Most people are worried about their jobs, healthcare, making rent, making their student loan payments! On top of this era of fear from 9/11. Make people fearful and distracted, so they don't know how they're being tracked, or how they're being manipulated.

Then it slowly changes from one formula to another. Or one bureau's special formula to 3. Or get your free credit report.

-I think the rules are extremely arbitrary. For example, why don't rent payments count to building a credit score? Or utilities? I think the models have been used in part to keep poor people down. Exclude key payments so they don't have higher credit scores (and thus lower interest rates).

Credit scores have been used as another tool of distraction (besides octo mom and balloon boy) so people *don't* pay attention to moron bankers that gambled the house away. Or they don't protest outside of the whitehouse, or protest on wall street.

That is a good question. Why don't credit scores count rent and utilities? A Landlord can ruin a Tenanent's credit score if they don't pay rent or simply break a lease but if you pay your rent every month on time your credit score is not affected.

I don't buy into the whole people with low credit scores pay more for their loans because they are more of a risk. They probably are more of a risk but it should be you either qualify for a loan or you don't. I think lendors abuse this to rob poor people. A low credit score makes this conveniant, legal and even "responsible" to do. By making someone pay more for a loan doesn't that make a person more likely to default?

[chet everett]

Positive record of payment of debts is not something that is uniformly collectable -- if you rent from your relatives would they be expected to be as honest in reporting information about you as a disinterested third party?

Lenders ought to be expected to manage risk in the best way they can, when that involves charging rates that offset some the risk the BORROWER ought to be the one deciding if the 'premium' is worth it...

[ddmhughes]

Originally Posted by chet everett

Positive record of payment of debts is not something that is uniformly collectable -- if you rent from your relatives would they be expected to be as honest in reporting information about you as a disinterested third party?

Lenders ought to be expected to manage risk in the best way they can, when that involves charging rates that offset some the risk the BORROWER ought to be the one deciding if the 'premium' is worth it...

Give me a break! What % of people rent from relatives? Why then aren't utility bills figured into your credit score? Can you buy utilities from your relatives too?

Extremely weak argument at best....

[debtmonger]

Five categories comprises your FICO score. Punctuality of payments, amount of debt, length of credit history, type of credit used and the amount of credit obtained recently.

This credit score ignores your type of job, salary, title, employer or employment history. Does not include what your paying on your current mortgage or car loan.

Did credit scores cause the financial crisis? NO... But by itself, it is a faulty way to find out if someone is able to pay off a loan, especially a mortgage.