How to steer clear of 'borrower in distress' label
I posed this issue to Fair Isaac Corp. and was told that "the credit reporting system is a voluntary one and ... lenders report what they choose to report to the bureaus, and each bureau represents that information a little differently on its credit reports."
While this reply confirmed that proper identification could be an issue, Fair Isaac claims that their systems work around this problem by giving the borrower the benefit of any doubt. If the system is not sure, it consolidates.
But this leaves open the possibility that the system has no doubt but is wrong. Pritchard pointed to mortgage inquiries from credit unions and finance companies as particularly prone to misclassification because other types of loans are originated out of the same offices. At his suggestion, I asked Fair Isaac what would happen if a mortgage shopper generated an inquiry from a credit union and a finance company?
The reply was that "the credit inquiries would in all likelihood be de-duplicated by the FICO scoring algorithm. Inquiries from both credit unions and finance companies are eligible for de-duplication." The italics are mine, and clearly suggest that there is no assurance that "de-duplication" (Fair-Isaac-speak for consolidation) will occur.
Bottom line for now
A case can be made that loan inquiries should be added to the list of borrower characteristics, such as sex, race and ethnicity, that, as a matter of public policy, can't be used in developing credit scores. The information could continue to be compiled and provided to lenders, but could not be used by the credit-scoring algorithm.
Meanwhile, borrowers shopping for credit should minimize the number of hard inquiries by ordering their own score, which does not count as an inquiry, providing that score to all the vendors they shop. You tell them that they can check your credit when you are ready to authorize it. This will reduce the number of hard inquiries to one, from the vendor you finally select. And do not seek new credit cards during the period you are shopping for a loan.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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