The Downside of Credit Scoring

While there are many advantages, to both the lender and the borrower, regarding credit scoring; there are also some serious disadvantages.

Damages caused by credit reporting:

Jobs: Employers often pull credit reports to determine if the applicant is responsible. A person's low credit score could stand in the way of getting hired.
Promotions: Employers also look at credit scores when issuing promotions. Again, a low score could prevent a person from qualifying.
Security: Different sectors of the government, the military, and similar organizations will review credit reports for security clearance purposes.
Renting: Landlords often complete credit checks. A poor credit history is likely to lead to being denied a place to live.
Insurance rates: Insurance companies are also known to deny an applicant with a low score. They also do periodic checks of the current policy holder's reports. If the reports are tarnished to a significant degree, the company may decide that the policy holder is a greater risk and can cancel policies or raise premiums.
Loans: Credit history and scores will affect the rates and terms of a loan or if one will be granted at all.
Raised interest rates: Low scores usually mean higher interest rates as it is. However, creditors, with whom an existing account is already held, can raise rates based on derogatory information on their client's credit report. And may do so without notice or explanation.

You reap what you sow?

Now, you may be thinking that credit scores are like report cards. Students who do A work earn A's. Students who do F work earn F's. Seems fair that if people can't pay their bills on time, or max out their credit cards, or file for bankruptcy, they should pay the consequences through a bad credit score right? Well, it's not always that black and white. While we don't condone reckless spending habits and irresponsible financial decisions, we don't judge our clients' reasons for their credit being in the shape it is in. Many times we find out that our clients have gone through hard times making it difficult or impossible to pay their bills.

You can imagine the turmoil of a single mother, whose ex-husband fails to pay child support; or the father and primary bread winner of a large family who is involved in an accident preventing him from working; or the person who has undergone a transplant, which insurance doesn't cover, and had to file bankruptcy due to overwhelming medical bills. The scenarios could go on and on. Everyone faces hard times at one point or another. Is it fair that the consequences should extend so far? People like these end up in a vicious cycle. Their tarnished credit report only complicates the issue.

Identity theft

Identity theft is the fastest growing crime in America. Millions of victims fall prey to ID thieves every year. In identity-theft cases, the victim often has to prove his or her innocence. This shocks most new identity-theft victims. They naturally expect the police, the credit grantors, the credit-reporting agencies and others in high places to help them. In most cases there isn't much the police can do. It is very difficult to convince lenders, credit card companies and the bureaus that you are innocent and it's even more difficult to reverse the damage.

Mistakes

It is a well-known fact that credit reports contain mistakes. In fact, a recent government study reveals that 1 in 5 credit reports contain mistakes; which equates to approximately 40 million. Half of those, 20 million, are serious enough to lower scores which will affect interest rates and possibly lead to the denial of credit, insurance, an apartment or a job. Not only does this negatively affect the consumer, banks, credit card companies and insurance companies end up making more money off you by charging you unjustified higher interest rates and premiums.

Dealing with the credit bureaus

The credit bureaus can be infuriatingly difficult to work with when it comes to correcting misinformation on credit reports. For one, the bureaus want to maintain their innocence and want the public to believe that everything they report is accurate. They also do not want to spend their time and money verifying information when they could be making more money collecting and selling information.