Are Credit Scores Just a Scam?

It sounds like something straight out of the conspiracy theorist’s playbook: a secret system that enslaves average citizens who don’t even know what’s really happening.

There are some consumers who believe that’s exactly what credit scores are designed to do: keep consumers enslaved in debt.

It’s easy to understand why some people feel this way. Our reader who goes by the screen name “gentile” has been trying to refinance his mortgage but can’t qualify. I “am not in their financial mold, don’t adhere to their criteria, so I will find another avenue, BUT IT WILL NOT BE THE CROOKED BANKS & CROOKED CREDIT RATINGS,” he writes.

Questions about the current system can be compelling. Why do problems that happened years ago still keep someone from getting credit? Why don’t lenders look at borrowers’ complete finances including their income and their assets? Why does it have to be so hard — and take so long — to rebuild or build credit?

Jewel, who commented on a story that explained that one late payment can drop your credit score by 50 points or more, said:

It’s because it allows credit companies to have higher interest rates and thus they can charge more for any money provided.

In one sense she’s right: Credit scores are designed to help lenders make more money. Sure, a banker might talk in terms of “better decisions,” or a faster application process, or the ability to approve more consumers for loans. But ultimately that boils down to one thing — more profitable lending.

Finding the ‘Right’ Borrowers

But to be profitable, lenders have to do a couple of things right. One is that they have to extend credit to a large number of customers. The size of the customer base will vary by lender; it will be much smaller for a community bank, for example, than for a large national credit card issuer. But nevertheless, to make money, they have to have a sufficient number of customers who are paying interest or generating income from fees (including merchant fees and credit and debit card transactions).

They also have to minimize losses. Once they extend credit, it’s hard to take it back. And so accounting for an acceptable level of risk is something that also has to be incorporated into the lending decision in the first place.

Finally, they have to be competitive or at least some of their customer base will go elsewhere — choosing other lenders, or deciding to simply get out of debt.

And that’s where credit scores come into play. They are an efficient and — depending on whom you ask — effective, tool for making lots of decisions quickly. They are only one part of the decision-making process, but they often they play a significant role in whether consumers get credit and how much they pay for it.

For those who were been blindsided by America’s recent economic woes, being stuck with a bad credit score is especially painful.

However, the companies that develop credit scores explain that recent information carries a lot of weight because they have found it to be more predictive.

Another problem is that people often find credit scores confusing. That’s not surprising either. Even a simple question like, “How many credit scores are there?” can be perplexing. At any given time, there are dozens of scores that could be ordered by lender evaluating an application. And just when you think you understand how the work, changes like FICO 9 — the new version of FICO scores — are announced.

“They’ll just change the rules again like they always do when people start doing better,” writes our reader who goes by the screen name Kde-girl. “You can’t win with this stuff, it’s programmed for the failure of some.”

While she may feel lenders are against her, the lenders themselves aren’t trying to exclude customers as much as they are trying to find customers they can lend to profitably. Yes, they say, they want to weed out bad credit risks, but they also want to find customers who do qualify.

Consumers can react to credit scores in a variety of ways:

Try to ignore them, pay cash for everything, and hope they won’t need a score in the future
Give up, ignore bills and just hope for the best, or
Take a proactive approach to their credit, and try to make it as strong as possible, with the understanding that sometimes that process takes time.

If you decide to take the latter approach, you want to make sure you review your free annual credit report and monitor your credit for free which you can do at Credit.com. Improve the things you can improve, and try not to give up if it seems like you’re making slow progress. Over time, negative information carries less weight — and eventually goes away. Time seems to speed up as you get older, and this is a case where that can help. “Credit score is a game you can play,” says our reader Eric.