Credit cards have been around since 1950, but not for anyone I knew. Debit cards appeared in 1966, a decade after I graduated from college.
Through 1970 I had bought four houses. For each one I took out a mortgage. I don’t know what checking was done of my ability to pay, but I didn’t have any problems. A couple of sheets of paper had to be signed. I made all payments on time.
Forty-two years later, in 2012, my wife and I downsized to a new home. No longer a simple transaction. Among the challenges was the little matter of finding my credit rating, something I’d never had to do before.
The bank took care of the request and sent me the result. I was fairly smug. I knew my rating would be perfect. What I knew was not what the bank discovered. It was far from perfect. Apparently, however, it was good enough to get the loan. And the man handling the transaction seemed fine with it.
But why wasn’t it perfect? I never was late paying bills. I didn’t borrow money. I didn’t buy items on time. I was my parents’ son.
A while back my bank started supplying my FICO score on a monthly basis. I wondered what FICO stood for, figuring something like Financial Information Corrupting Objectivity. So I was surprised to see it was a credit score whose value was calculated using software from Fair Isaac COrporation. How dull!
Getting my FICO score was a throwback to the house purchase. It wasn’t perfect. I’ve been following it monthly and have observed it rise and fall, although there does seem to be a downward trend. I’m told it’s always excellent. But why not perfect and, even more interesting, why that variation from month to month when there is no significant change in the way I live?
Out of curiosity I pulled one of the three free credit reports I can get each year. It didn’t come with a score and I didn’t request one because that info cost almost eight dollars. I was amazed at how much data are available about me in one spot. I do not like it.
Most probably have a better feel for why my credit scores operate as they do. I don’t pretend to know anything about this field. However, I have come across two possible explanations, both of which I find offensive.
A knowledgeable friend explained that, since I have no current debt, not even for a home, there is no record of my being a reliable person to whom money can be loaned. Yeah, it takes a lot of contortion to make sense of this. It appears that having debt and paying it off is a better attribute than not having debt at all. Buying something you can’t afford to pay cash for shows a more reliable financial position than not buying something you can’t afford to pay cash for. It was suggested I take out a loan and pay it regularly to increase my score. Yeah, sure.
I certainly don’t understand the fine points of the second possible explanation for a lower score, but I’m quite happy to be annoyed even in the face of my ignorance. As I understand it, I am lumped into a large data base of consumers having similar profiles to my own. Then, on a statistical basis, it is determined the odds of someone in that data base having a poor debt payment history. And then that determination is applied to me!
So, I’m a mathematician and I find mathematical (statistical) concepts being applied to solve a problem, namely, what are the odds I will pay back a loan. How can I possibly be upset?
Here’s the problem with that. There are two entities. One is this mass of people who are sort of like me. The other is me. The first possesses a profile which is overlaid on me. The second possesses a profile which is me. Those two profiles are not necessarily the same, and for any one person will rarely be the same. I object to that. Things might work out statistically for companies offering credit by this means, but I could be hurt by not matching the communal profile.
If one’s credit score is low, the companies offer the following advice to improve it: pay bills on time, pay down outstanding balances, stay away from new debt. But don’t be too good at it or your score might drop.