Criticisms and controversies of Credit Scoring
In this section sum up some of the sums and controversies associated with the credit scoring and FICO scores.- The credit report must be updated by the lender on a monthly basis. The credit scores are badly affected if the information on the credit report is not updated in a regular basis. It is the responsibility of the data furnishes to inform the bureau of any debt reduced or paid off. Eventually, the debtors singlehandedly have to find the errors and report or update the status themselves.
- Don't fall in the trap of increasing your credit limit to increase your credit score. Some of the credit-repair agencies are hired by individuals to do the needful. These agencies report to credit bureaus that they have opened an account for the individuals with a high credit limit. The customers cannot operate these accounts but these are only opened to boost the customer's FICO score. This practice is called as authorized user account abuse. The new version of the FCIO score known as FICO 08 bars the individuals from using such means of abuse for enhancing their score.
- Another controversy related to credit scores is the enhancements in FICO 08 for predicting risks of subprime borrowers. Many lenders approve loans for subprime applicants. These applicants are most ineligible for loans as they demonstrate poor scores with a very risk of never repaying the debts. By overlooking the ability of the borrowers to pay off the loans in the future, many of the lenders have put the borrowers at risk for default.
- A recent study has put the accuracy of FICO in the limelight. In 2001 there was an average 31-point difference in the FICO score between borrowers who had defaulted and those who paid on time. By 2006 the difference was only 10 points. This questions the exactness of the FICO scores and methods for evaluating customers. Because of this reason, some banks have stopped relying on FICO scoring. For example, Golden West Financial (which merged with Wachovia Bank in 2006) abandoned FICO scores for a more costly analysis of a potential borrower's assets and employment before giving a loan.
