Author Kristy Welsh Archive

The title alone might surprise some people who mistakenly believe that a person’s credit score and also their credit reports are something issued by the government like birth certificates and Social Security cards.
It’s easy to understand the mistake — your credit report and credit score have almost as much impact on the lives of an American citizen as a government-issued document: Your credit report may make or break you in the job world, help or hamper you in your dream of attaining a home or auto.

So why and for who was credit scoring first developed? Fair Isaac was started in 1956 as a way for businesses to make better credit-granting decisions and billing. In 1970, the company developed its first general credit card scoring system. In 1975, it introduced its first behavior scoring system to predict credit risk related to existing customers, and in 1981, Fair Isaac successfully marketed its scoring system to the existing credit bureaus: Equifax, TransUnion and TRW (now Experian).

When a consumer’s credit history became available through modems and then later the Internet, mortgage companies were able to pull a customer’s credit score, and it was sold to the banking industry as a way to save time in making credit decisions; indeed, a person’s credit score became the first line of defense for underwriters. In most cases, the data which produces the score, i.e., the credit report, is no longer reviewed.

Which would be better — government bureaucracy with all its red tape to handle your credit or private companies? The Fair Credit Reporting Act, which monitors the activities of credit reports and the scoring system, was implemented to protect consumer privacy from the lax approach of one credit bureau in particular. In the 1960s and early 1970s, Equifax was attacked by Columbia University Professor Alan Westin, who laid into the bureau for its cavalier attitude toward the accuracy of its information on consumers, and for giving out that information to practically anyone who asked for it.*

Currently, the specifics of what goes into the available scoring models is “classified” information — would the government be more transparent if it had been running the credit game? I would hazard a guess of “yes,” as this type of regulation would not be considered military secrets or national security. The developers of the credit scoring system argue that “transparency” would allow consumers to manipulate the scoring system and “render it useless.” I’m not sure I agree — a late paying record or bankruptcy cannot be “manipulated.”

I see far too many abuses of consumer data by the bureaus in the name of increasing profits by cutting corners; computer-automated error disputes, lack of staffing and minimal review (if any) of consumer-provided documentation. It’s common knowledge that fully 60%+ of consumer credit reports contain errors — if the government ran things, disputes might take weeks to resolve, but most likely a human being would be involved.

What’s your opinion on the effectiveness of our current credit reporting system?

Footnote

* Wired Magazine: http://www.wired.com/wired/archive/3.09/equifax.html

The title question may seem ridiculous on the surface — we’re all seeing prices in our everyday lives go up. But is one of the factors in the current rise in prices our own fear and uncertainty? The two biggest price increases in the news these days are food and gas. Are food producers and fuel companies taking advantage of this headline-grabbing information and increasing prices because in part because we expect things to cost more?

To answer this question, let’s look at some real data on exactly how much prices are going up. The Consumer Price Index (the U.S. Consumer Price Index is a time series measure of the price level of consumer goods and services, or basically — how far does your dollar go in the current economic environment) shows:

3-month comparison:

• Energy costs: 28.2% increase in the compound annual rate for the 3 months ended May 2008
• Food costs: 6.2% increase in the compound annual rate for the 3 months ended May 2008

1-year comparison:

• Energy costs: 17.4% increase in the compound annual rate for the 12 months ended May 2008
• Food costs: 5.1% increase in the compound annual rate for the 12 months ended May 2008

So for food, 5% over last year — not so bad, but energy, 17.4 % — ouch! Now let’s take a 10-year look:

• CPI food in May 1998: 160.3
• CPI Food in May 2008: 211.918

• CPI Fuel and Utilities May 1998 129.3
• CPI Fuel and Utilities May 2008 222.094

Over 10 years, food is up 25%, fuel 75%, again — ouch! However, the spike in fuel costs has happened all in the last year, and, many people feel, is due in large part to speculation. Will this trend continue? Oil will probably not go back down to $50/barrel, but the recent run-up in prices looks suspiciously like a bubble to me.

Panic in the stock market has reared its ugly head several times in the past — 1928, 1987, 2001 — and was always preceded by what Fed Chairman Greenspan famously labeled “irrational exuberance” in the stock markets. The current climate was definitely the irrationality of the real estate market. I submit that as fast as the real estate market zoomed inexplicably upwards, a frenzied “the sky is falling” climate can drive prices in an equally irrational direction.