FICO credit scores have been insignificant in everyone’s lives since its inception. A majority of lenders in America use FICO to determine the approval of mortgage, credit card, or auto loan including how much one can borrow, and the interest rate to be paid.
People paying on time, have low credit card debt, and no bankruptcy filings are likely to get the best of scores. On the contrary, people skipping payments and filing bankruptcy become a victim of low scores. The guidelines look justified though but in reality, it’s discrimination between the wealthy and the downtrodden.
The Story That Backfired
An institution that pledges to help people procure funds should never be biased and must fulfill the ease of releasing the funds. Unfortunately, the FICO faltered way back in 2008 when the financial crisis showed its ugly side. People were devastated, bankrupt, and emotionally down following the large scale unemployment, layoffs, and debts written all over. Lenders were disappointed as the risk management tools were inadequate.
Our nation’s largest banks tend to rely on the scoring policies but these are slowly being overtaken by new lending startups that have begun to experiment with alternative ways of underwriting credit risk.
No Credit, No Score!
Most people under the age group avoid credit cards because of a lack of credit scores. According to a survey, about one-third of the Americans don’t own a credit card. Not surprising, because the credit card is a burden one pays for and has little to do with pulling him out of a financial crisis. Being introduced as a gateway for young people at an early age, credit cards were supposed to build a credit score.
The CARD Act of 2009 was the nail in the coffin for credit card companies that restricted the ability to market credit cards specifically on college campuses, and this eventually led to a cut card issuance to nearly half. The Great Recession was an eye-opener for millennials who are shunning the credit card products and diverting their attention towards savings which is a great credit risk.
Cash Flow: Everlasting Financial Process
The continuous inflow of income or cash is perpetual and there is no denying the fact that every individual survives on his access to liquid cash. Post the financial crisis, the lending industry was too interested in the credit scores. The higher the score, the borrowing was unlimited but FICO was concerned with timely payment by consumers. With infinite access to credit, many people used that credit to pay credit.
Many lenders started betting on credit scores as a proxy over the income with regards to repayment by people. Such a suicidal move! Allowing algorithms to take over common sense.
Beginning Of New-Age Lenders
The 2008 financial catastrophe led to the birth of a new breed of lenders who were smart and practical, paying attention to cash flow in their underwriting. FICO has never addressed the people’s financial needs instead it has been a speed breaker for the availability of money.
The new lenders are a tad logical in their approach that listens to the financial woes of people and has customized their offerings for the benefit of consumers. The modern-day lenders offer interest-free funds without credit risk that help people when they are in need of money and need not fear being rejected by FICO scores and traditional banks. The current lenders have capitalized on economic recessions that throw the citizens’ lives out of gear by providing financial assistance with immediate funds and safeguarding the survival of people during such times.
FICO: Missing Signals
The recent updates in the FICO scores have added more confusion in the form of giving scores based on the payment history of consumers (a bad idea when the whole world is frequently hit by economic recessions). Previously, the inability of a person to make a down payment on time for a mortgage applied is an indication of great risk but FICO ignores it. They can penalize somebody who discontinues or closes his/her credit cards.
More absurd is the ignorance by FICO of individuals who pay all their utility bills on time as a responsibility. Even worse, when the income stops paying the bills is a herculean task.
If the difference for approval of funds lies in the scores then the current COVID-19 pandemic will make no sense for those who are affected in millions due to the COVID-19 pandemic. FICO is not going anywhere and will stay in the foreseeable future but the question is how many of you can maintain the scores when the economy has hit rock bottom? The last few months indicate a grim financial situation for many as the job market is on the downside with businesses dwindling and some even shut. The new lending models need to rethink their strategies as the missed payments will continue for now.
Is FICO listening….? Please do… before you become irrelevant!