I spoke at three different organizations last week and there were many questions asked about credit, credit scoring and specific situations. One question was asked at all three presentations and I have never addressed it before....so here we go.
The question, "who set up this credit scoring system?" Many have an opinion that the scoring system is flawed and in my talks I provide several examples that support that opinion. They want to know, why do we use it when there are so many problems with it.
When I first started underwriting, we used common sense underwriting as credit scores were not required in the lending industry. Pre-approval underwriters would look at a person's income, collateral, and character (pay history). We called these the three C's. In the late eighty's something was coming into play that included a "credit score". Over time, the lenders were able to save lots of money by cutting the jobs of the pre-approval underwriters by using the credit score to make the initial decision. This step had to save the lenders millions upon millions of dollars each month as these underwriters were let go and technology took their place.
Auto and manufacturing jobs get a lot of publicity for being lost but technology and credit scores have shuffled or removed countless jobs. ATM cards use to be tellers. Credit scores use to be underwriters, self scan isles use to be cashiers....and so on.
Back to the story...by the mid to late ninety's, credit scores were required by the lending industry which is really our government. Fannie Mae and Freddie Mac (both quasi government agencies) require what is called a "merged bureau" that includes all three credit bureau sources and three scores. If the mortgage company or bank or credit union wants to get paid....they pull credit scores. It is all about government mandates thru Fannie and Freddie which set up all the rules.
So there you have it...........we are stuck with credit scores because of Uncle Sam.