The economic downturn and its negative impact on credit have created a new reality for many consumers. Even those with excellent credit ratings, and with the income to repay a mortgage or credit line on time, are finding their access to credit reduced.
One reason for this is the decision by many financial institutions to deal with their past overextension of credit by sharply reducing its availability today. This means closing the credit window on riskier consumers and, in some cases, reducing the credit lines of the most creditworthy consumers.
It's understandable that many of their more creditworthy customers would be unhappy about those decisions. It's also understandable that some would be concerned about the possible effect on their credit score and how that might affect their future access to the credit they need and feel they deserve.
But as we return to more normal credit markets, it's vital that consumers, regulators and the financial industry all step back and recognize just what that means today, Thanks in part to broad adoption of credit scores, we have a modern credit system based on objective, analytics-based lending decisions.
Such a system is far more likely to lead to a rapid restoration of the American credit markets than would be possible in a market based on subjective (and inherently less fair) lending decisions.
Some 20 years after lenders first adopted FICO credit scores, which my company created, Americans enjoy an equal opportunity for credit based not on a lender's impression of them, but on a sound statistical analysis of their creditworthiness. The credit score has been one of the most important tools that have allowed consumers all across the nation, regardless of factors like race, gender or neighborhood, to get mortgages, lines of credit and credit cards.
Lenders trust the score because it is a highly predictive risk measure that helps them make faster, fairer and more consistent decisions. Consumers can trust credit scores knowing that their creditworthiness is objectively defined, free of conscious or unconscious lender bias.
While stories about credit-line decreases are in the news, they actually have affected a small percentage of Americans about 20% of borrowers by our count. If you take out consumers whose credit missteps triggered the decrease by not paying bills, for instance then about 15% of Americans are affected.
Though such credit-line decreases can in some cases have an impact on one's credit score, they are unlikely to change the score enough to have any impact on credit availability for the majority of consumers. In fact, those affected consumers without a misstep already have some of the nation's highest FICO scores a median of 760 on a scale of 300-850. The vast majority of changes in these scores were less than 20 points and in some cases their scores moved up.
FICO has continually refined its scoring systems when changes in the economy and consumer behavior indicate new patterns in consumer repayment activity. And we have worked in partnership with the government and financial regulators to make sure our score algorithms also remain in sync with the rules that exist to ensure fairness in granting credit.
Despite major changes in the world of credit in the past two decades, this one thing has remained constant: Because credit scoring formulas like ours are rigorously objective and kept up to date, the credit score is a strong predictive marker of the likelihood consumers will pay their debts as agreed. It is one of the essential elements in the total equation that sound lenders use to make credit decisions.
When the economy falls on hard times and credit is tight, even the most creditworthy borrowers can be frustrated over access to credit. Lenders have swung from exuberance in lending to excessive caution. There is temptation in such an environment to forget about the strong foundation provided by this objectivity. Some may seek to "correct" perceived short-term unfairness in the credit markets by calling for ad hoc "adjustments" of credit scores for select groups or making other changes in the algorithm. But the moment we insert such subjective adjustments into the mathematical reality of analytics, we eliminate the very objectivity that gives credit scores their value.
We would soon wind up with a system in which scores would no longer be reliable predictors of credit risk and thus they would become less relevant to lenders. That could in turn lead us back to the days before the credit score when lending was a more subjective practice and a time when so many Americans found it difficult to get a loan due to their race, their gender or the neighborhood they lived in, even though they were creditworthy.
The democratization of credit through use of credit scores is felt by many to be one of the most significant improvements to our national economy in the last 50 years. If we lose its objectivity, we put that very democratization of credit at risk. At a time when the future of the American economy requires restoring the credit markets to good working order, that's one risk we can't afford to take.