The other day, I got to wondering something: What is the effect of
automated payments on credit scores? Automated payments, I reasoned,
reduce late payments among the people who are basically responsible
budgeters but terrible at remembering to mail their bills on time every
month. Those people should see their credit scores increase as they rack
up fewer late payments to creditors.
Alas, the Internet seems to be silent on this point, or at least my Google-Fu was not good enough to discover any research that could shed light on my theory. But I did stumble across an interesting paper put out by RAND Corp. last year on the impact that credit scores have on auto lending.
Even though I lived through it, I find it a bit hard to realize how new the credit-scoring revolution actually is. Credit scoring has been around for a while — the Fair Isaac Corp. was founded in the late ’50s — but it wasn’t until the information technology revolution of the 1990s that companies got enough data storage and computing power to start slicing and dicing their loan portfolios by credit score. The auto-financing company RAND studied used uniform pricing and traditional interviews for loan issuance as late as 2000.
Here’s what happened when it shifted to a more sophisticated credit-scoring model: higher interest rates and down-payment rates for risky borrowers, better rates for those with better scores.
Essentially, we see a microcosm of what happened in the larger economy over the past few decades: People with steady payment histories and low levels of outstanding debt relative to their available credit got better loan terms, and were therefore able to borrow more money (because their interest rates went down). They got bigger, nicer cars, and auto lenders became more profitable.
The financially marginal, on the other hand, found that their financial lives got harder still. Their poor credit histories meant that they could no longer get loans, or they could get them only at painfully high rates of interest. They would have had to drive less car — or, possibly, only whatever they could afford to pay cash for.
Credit has long been thought of as a democratizing force. It enabled ordinary Americans to buy houses, cars and other amenities that had previously only been available to those with substantial capital. But over the last few decades, that process has been reversed.
Read more: Credit scores drive America’s growing inequality — Opinion — Bangor Daily News — BDN Maine
Alas, the Internet seems to be silent on this point, or at least my Google-Fu was not good enough to discover any research that could shed light on my theory. But I did stumble across an interesting paper put out by RAND Corp. last year on the impact that credit scores have on auto lending.
Even though I lived through it, I find it a bit hard to realize how new the credit-scoring revolution actually is. Credit scoring has been around for a while — the Fair Isaac Corp. was founded in the late ’50s — but it wasn’t until the information technology revolution of the 1990s that companies got enough data storage and computing power to start slicing and dicing their loan portfolios by credit score. The auto-financing company RAND studied used uniform pricing and traditional interviews for loan issuance as late as 2000.
Here’s what happened when it shifted to a more sophisticated credit-scoring model: higher interest rates and down-payment rates for risky borrowers, better rates for those with better scores.
Essentially, we see a microcosm of what happened in the larger economy over the past few decades: People with steady payment histories and low levels of outstanding debt relative to their available credit got better loan terms, and were therefore able to borrow more money (because their interest rates went down). They got bigger, nicer cars, and auto lenders became more profitable.
The financially marginal, on the other hand, found that their financial lives got harder still. Their poor credit histories meant that they could no longer get loans, or they could get them only at painfully high rates of interest. They would have had to drive less car — or, possibly, only whatever they could afford to pay cash for.
Credit has long been thought of as a democratizing force. It enabled ordinary Americans to buy houses, cars and other amenities that had previously only been available to those with substantial capital. But over the last few decades, that process has been reversed.
Read more: Credit scores drive America’s growing inequality — Opinion — Bangor Daily News — BDN Maine
No comments:
Post a Comment