It only makes sense that the credit industry has a way to flag consumers that are not paying the debts that are incurred. The algorithms used by FICO and the systems created by the different reporting agencies use the negative listings to help lenders make better decisions about where to lend capital.
The problem with the equations that the credit industry uses is that they don’t also give some weight to good behaviors that consumers may practice. Those consumers that make timely payments, early payments, or pay off balances early get no recognition for the diligence or wise financial moves required to make those payments.
Even worse for consumers that use sound judgment with credit issues is that some choices can end up hurting a credit rating. Good decisions for the consumer may end up looking bad to the credit industry.
Negotiated Settlements
Most of the time a credit card balance or other type of rotating credit is much higher than anything a consumer charged to that account. Interest and fees will push the balance out of control. When consumers negotiate a lower balance that is to be paid in full then most companies list that account as charged off. It is a red flag that the consumer did not pay the debt in full and not demonstrate how the consumer is willing to do what is right and acceptable for all parties involved.
Unused Accounts
Open credit that is not used is just a problem waiting to happen. There are too many warnings about identity theft and other cyber crimes not to consider closing accounts that you no longer use. It is the responsible thing to do. The problem is that closing accounts will actually hurt your credit score – particularly if they are the older accounts on your credit history.
Lowering Balances
Some consumers will ask rotating accounts to lower credit limits because the full amount is never utilized. This can cause a lowering of the credit score for the same reason that closing unused accounts can hurt it.
Not Using Your Credit or Using too Much
This is the ultimate Catch 22 of the credit industry. Companies frown on too much rotating credit that is available on current accounts. If you lower the limits you take a hit. If you use the credit then you will take a hit because the same industry frowns on a consumer that utilizes too much of the existing credit limit.
Credit Inquires
Searching for the right deal can be costly. Too many inquires for credit on your credit history will cause your credit score to go down and your interest rate options to go up. The one relief is that similar inquires (like for a mortgage) all done within a 14 to 30 day period will be counted as just one inquiry.
The system is not fair. Bad financial habits are penalized but good financial habits are not rewarded. In many cases making wise financial choices can actually hurt your credit score. The rating companies seem to be looking out more for the lender than they are for the consumer. Even with the regulations that the government has imposed, the credit review system is slanted away from the consumer.
The credit history and credit score system may seem like a better choice for the consumers, but having individuals that can review a credit history and actually judge all the different aspects of a financial past is usually more valuable. It is important that there be some weight given to the good aspects of the consumer’s financial past and not just weigh what is beneficial to the lender.
Next: Situations Devastated Finances