Bloomberg article way off base regarding credit scores

07.02.09
By John Ulzheimer

I kicked around the idea of calling this article something a little more theatrical like “War of Words” or something to that effect, but the simpleton in me opted for what you see above. An interesting little war among those in the media is shaping up, and my passive-aggressive side is jumping right in with both feet to fan the flames.

On June 15th, the New York Times ran an article about debt settlement that left a gaping hole by not mentioning the downside to the practice. On June 18th, MainStreet, a TheStreet company, published an article that properly filled in the Times’ blanks and ripped the New York mainstay a new ear hole. And now comes battle royal, Part Two:

On June 30th, Bloomberg ran an article called “FICO Scores Show Flaws as U.S. Banks Cut Credit Lines.” The article clearly bashes the credit score giant and their core product by pointing out that consumer credit scores are lowered when credit card issuers lower credit limits. They even take a quote from a consumer advocate who calls the FICO score “...the worst system around.”

Rather than waiting for another major outlet to publish a MainStreet-style counterpunch, I’ve decided that I’ve got FICO’s back on this one. And in the spirit of full disclosure please remember that I spent seven fun-filled years getting paychecks from the boys in propeller hats. The Bloomy article does a fairly good job of screaming: “The sky is falling” from Chicken Little fame. Where it fails miserably is that it doesn’t take on any opinions from a truly neutral third party that understands credit scoring.  

Bloomberg does interview several parties from FICO, but you have to keep in mind that FICO’s public comments are going to be tempered because, among other things, they don’t want to throw their partners or customers under the bus. Their comments are going to be as neutral as Switzerland. Mine, on the other hand, will be based on reality. Since I am beholden to no one, my comments may be a little more insightful on the subject than an unqualified statement like “it’s the worst system around.”  

Credit limit reductions can cause a consumer’s score to go down. That’s completely true. But blaming FICO or calling this a “flaw” in the system is a joke. Here’s why:

• A lower limit can cause consumers’ revolving utilization to increase. This can lead to a lower credit score. But the decrease in credit score may very well be not only justified but also statistically valid. As consumers’ available credit decreases, their risk increases, right? Less capacity and less access to capital in an emergency equals more risk to lenders. The article makes no attempt to investigate the question.  


• Are the lower scores any less predictive than the higher scores? The article, again, offers no evidence that lower scores paint a misrepresentative picture of consumer credit risk. Remember: Credit scores are not a board game for consumers who want to try and get as high as they can; they’re a tool for lenders. If lenders are able to fairly judge a consumer’s credit risk with the different (albeit lower) scores, so be it. If consumers don’t like that, they should pay off their credit card debt and/or open a new credit card, both of which will serve to increase their scores.


• Does the lower credit limit and lower credit score paint a more accurate picture of the consumer’s credit risk? Bloomberg missed this fairly important (sic) topic. In today’s environment, can anyone honestly say that they’re a BETTER credit risk than they were 24 months ago? I don’t think so. I’m surely a higher risk even though I’m gainfully employed and never revolve a balance. It’s the nature of the credit crunch beast.

So, I would like to take this opportunity to suggest to Bloomberg that the next time it wants to shock its readers that it offer them something more than the opinions of two consumers, a congressman, three consumer advocates, and a guy who, at best, knows how to spell “credit score” while he proclaims that FICO’s market dominance is due to Fannie and Freddie (which seems to ignore the fact that FICO had as much, if not more, market share prior to the GSE’s adoption of FICO scoring in the late 90s). Offering a balanced perspective and analysis is important; after all, those qualities mark the kind of truthful reporting that consumers should count on. 

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Offering a balanced perspective and analysis is important.