20 May The Dilemma with the Credit Industry
The credit industry is at a crisis point. On the one hand, inaccurate reporting is hurting credit scores and causing a lack of trust. On the other hand, the scoring system itself is broken. It has proven time and time again that it isn’t a good indicator of risk.
Let’s begin by looking at the inaccurate information that litters credit reports.
A Lack of Accuracy Leads to a Lack of Trust
For years, there have been murmurings that credit reports often contain tons of inaccurate information. Those murmurings finally reached a fever pitch when John Oliver took the credit industry to task during a segment of his HBO show, “Last Week Tonight.”
During Oliver’s segment, he noted that people often end up with everything from other people’s debt to other people’s criminal records on their reports. He then went on to state that credit companies brag about having an accuracy rate of 95 percent, which still means that 10 million people have false information on their reports.
In reality, the number might be far greater. Tens of millions of people might have false information on their reports, which is against the Fair Credit Reporting Act.
This has left those in the credit industry wondering how they can continue to provide a service to the masses and stay within the law. Is it possible for the industry to overcome this dilemma?
The Debt Dilemma – Another Issue for the Credit Industry
The credit industry’s inability to provide accurate data is just one problem. The industry is also in the midst of its own debt crisis that proves how meaningless credit scores are.
On the surface, credit in the United States is better than ever before. Americans’ average credit score is now 700, which is higher than it’s ever been since FICO started tracking it in 2005.
That’s great news, right? High credit scores mean people have spending power like never before.
It’s not as good of news as you might think. First, look at why the scores are so high, and then check out what that means for consumers and the industry as a whole.
The Score Boost
Do you remember the housing bubble that caused the recession? When that bubble burst, people lost their homes and their life savings. They also lost their faith in the system.
People who would normally get credit decided against it. They spent what they could and didn’t finance a thing. On top of that, they paid off the debt they owed.
This is basic credit 101. Stop taking out new credit and pay off existing credit to make your score go up.
Americans did it in droves, and their scores went up. At the same time, the money in their savings accounts increased.
All wasn’t well on the home front, though. A crisis was looming, right under people’s noses.
Rising Consumer Debt – The New Problem
Now, as people feel more comfortable, consumer debt is going back up, but it isn’t the same kind of debt that it was a decade ago. Student loan debt has reached an all-time high, and auto debt is at more than $1.1 trillion.
In fact, household debt is over $12 trillion now, which is a huge increase over the $50 billion it was at in 2008.
As the debt continues to increase, interest rates are going up, as well. This has created a perfect storm of sorts for borrowers. Credit card delinquency is up to its highest rate since the middle of 2013. People are also defaulting on their auto loans.
As the defaults go up, scores are going to go down, which could make interest rates go up even higher. This is proof that the scoring system doesn’t work. This little lesson could prove to be fatal for the credit industry as some insiders predict that the credit market might collapse.
When you learn what is going on inside of the credit industry, you probably feel a little bit nervous. That is normal, but you don’t have to be scared. You can take control by checking your credit report for errors and limiting the amount of credit that you use. That will put you back in the driver’s seat.