Friday, June 26, 2009

FICO Gamed

FICO is the credit scoring system that tracks credit worthiness. Anyone using credit eventually gets exposed to it and what has happened in the financial business is that the industry has shifted more and more of the decision making process onto automatic systems. This has opened the door to aggressive and abusive gaming of the system by the lenders.

Here is an example of apparent practice. A credit card holder discovered that an error had occurred in his statement. It was a modest error that had the effect of delaying a posting. This dropped his FICO score by two hundred points. This triggered the interest rate to be reset from a very low rate well under 10% to the maximum of 29%. I believe his whole credit card debt was instantly affected. This all took place over a couple of days. Pretty efficient obviously.

He then proceeded to attempt to correct the error. Then he discovered that he had to send a letter outlining the complaint by snail mail and that a full three months or so may elapse before it would be addressed. Realistically this procedure would delay satisfaction for at least six months. The customer would have to be totally anal to suffer through this sort of abuse. This clearly is a deliberate gaming of the system that curiously is typical of an account driven system that has lost touch with its customers. I hate to recall how many times I squabbled with the type who thinks they are doing you a favor.

The point I am making is that the industry is obviously been run by sharps who have now forced the creation of new legislation to protect consumers from abusive practice. Anyway, this is the tip of the iceberg of what has happened to our formerly robust financial system.

What makes it particularly stupid, unless someone shows me different, is that the credit industry cannot go to the courts to successfully collect at all. Thus if credit card holders went of a mass revolt, the industry would not be able to ever recover. It is very much in their interest to coddle their customers who actually enjoy the service and will work hard to keep it in good order.

For what it is worth, a trip to the court house means a discovery process in which you make the credit card company document each and every item creating the claim. To do that invariably generates hundreds of man hours of accounting and copying. Just do not admit any memory of a particular transaction and insist on proof.

Of course, the simple solution is to pass a law in which defaulted credit is converted to a simple low interest loan based on the principle alone. This penalizes the company for lending to bad credit risks and permits a reasonable pay down of the loan and eventual restoration of credit.

Will creditors take advantage of this? Of course, but the negatives are a lot less than bankruptcy, and a restored customer really means he has a new job, and in most cases is back in business.

The point I want to make is that no business funded on high interest loans is inherently stable. The credit industry is now trying to gouge the disappearing creditors as they hastily exit the party. In the process, their business will violently contract and it is certainly not the customer’s fault

No comments:

There was an error in this gadget