Circumstances Mean Squat. Why Not Measure Character?
What's interesting about the five Credit Killers listed previously is that they have nothing whatsoever to do with a person's character. They ONLY measure circumstances. So, our credit scoring models really do nothing to measure how honest or trustworthy or good a person may be. They simply measure the stuff that's happened to a person. How can the stuff that's happened to a person be a basis for grading their good name?
Right now, the credit system measures just a few things. In order to give you a credit score, the system tracks and measures:
- The number of credit accounts you've had.
- How long you've had credit.
- How many times you've been late.
- How much you owe compared to how much credit you have.
- How many times you have applied for credit in the last while.
- And, the number and kinds of super-bad listings (collections, bankruptcy, etc.).
That's basically it. The rest of the stuff on your credit report is basically ignored by the scoring models.
The purpose of credit scoring and credit reporting is very simple: it's to decide whether or not you can be trusted with credit (and how much to give you). In fact, nobody would dispute that definition. In order to figure out whether or not you can be trusted, ONLY the six things listed above are considered. Of all the thousands of character traits, facts about your life and facts about your history that could be considered, the credit system considers only those six.
Let's imagine that the credit system was an online dating service. If you haven't used an online dating system, just imagine a computer program that asks tons and tons of questions and then provides your answers to people who might be a good date for you (questions such as: "How tall are you?" or "Are you religious?") So, you and the other people answer dozens and dozens of questions, you read each others' answers and you decide if you should email them and ask for a date. Actually, an online dating service is a lot like the credit scoring system. You're data is provided to the credit card company that then checks your answers to see if you're a good match for their card.
But, if the online dating services were like the credit system, you would have to decide whether or not to go out with someone based on their answers to the following questions:
- How many times have you gone out on a date in your life?
- How long since you started dating?
- How many dates were followed by second and third dates?
- Do you go out with a lot of people?
- How many people have you asked out recently?
- How many dates have ended badly?
Now, based on the answers to those questions and those questions alone, you must decide with whom you'll go out. You can't ask how tall they are, what they look like, what kind of work they do, what life philosophies you share, do they like pina coladas or getting caught in the rain, etc.. It's probably safe to say that, based on those six questions alone, you could probably end up with some pretty horrific match-ups. Just imagine the number of Danny DeVito-looking guys who would get hooked up with super-models under that system and vice-versa. It would be a complete bust.
Likewise, the credit reporting and credit scoring system is really just a bean-counter's attempt to put lipstick on a pig. There is so little data (and that data is usually so inaccurate) that it's no wonder that bad credit decisions are made. Clearly, more information would be better!
Here are the kinds of things that could be considered in a more sensible and complete credit system. Again, we think that more credit reporting and more credit scoring would be a good thing. Here are just a few of the many things that should probably be added to the credit scoring matrix:
A person who is engulfed in substance abuse is probably a bad credit risk. Regardless if the person's a cocaine abuser in a $200,000 a year job or an unemployed alcoholic, that person should be denied credit (and probably offered treatment).
Jennifer loved her small businesses. She and her husband had worked tirelessly to build a cooking supply store and a rental property that brought in great income. On top of her entrepreneurial passions, Jenn worked for the state. For twenty years, since she turned eighteen, Jenn's credit had been stellar. She could get anything she wanted with credit, but she still held back just to make sure that even in a crisis, she had enough money to cover all her bills and then some.
But, all Jenn's preparation came to nothing when her husband spiraled into a pit of self-destruction and violence. Over a short period of time, it became clear that he had become a raging alcoholic. The alcoholism exploded across their lives in a series of disasters: DUIs, the loss of his license and, ultimately, into domestic violence. After a single evening of physical violence against herself and her children, Jenn acted fast to get a restraining order against her husband of fifteen years. Nothing would ever be the same.
Without his help, the businesses began to falter and Jenn scrambled to keep the family on an even financial footing. But, to make matters worse, Jenn was pregnant with their fifth child. She knew that she would have to take time off from her job with the state and she knew that she wouldn't be receiving any income during that time. Her husband was paying no support whatsoever and Jenn knew that disaster loomed just as certainly as the coming of her baby.
She scrambled to sell the rental home and the cooking supply shop. Luckily, she sold both, but it wasn't enough to avert financial disaster. With five children and no income, Jenn was reduced to seeking welfare and food stamps while on maternity leave. As soon as she could, she returned to her job and began rebuilding. But, her credit was destroyed and it would be a long, long way back...
Credit Revolution: Path of the Smart Consumer 2007 John C. Heath, Esq., Dr. Randy Padawer, Jayson R. Orvis. All Rights Reserved. Published by Far Cliffs Multimedia, LLC