Home \ Blog \ Artificially Inflating Credit Scores to Boost Lending…What Could Go Wrong?

Artificially Inflating Credit Scores to Boost Lending…What Could Go Wrong?

The creators of the credit score, Fair Isaac Co. (FICO), have unveiled a new way to determine your credit score, the result of which will a massive increase in bank loan activity, with loans going to applicants with a less-than-ideal credit score.  These re-labeled subprime borrowers have similarities to subprime loans, which raises a similar question: what could possibly go wrong?

The new tool, which has been named UltraFICO Score, will factor in how consumers manage cash in their checking, savings, and money-market accounts.  As a result, it is expected that there will be a significant increase in credit card approvals, personal loans, and other debt.

But with consumer loan levels, including credit cards, auto loans, and personal loans already at record highs, it leads to the inevitable question: Who is going to get these loans and should America’s families be taking on additional debt this late in a business cycle where real wages continue to stagnate?

Having already lent money to credit-worthy borrowers, the biggest banks have been searching for others to lend to in an effort to collect fees, interest, and so forth.  The only option remaining is to lend to less credit-worthy borrowers.  While that may be good in the short term for bank profits, it’s inevitably a fool’s errand because when the inevitable downturn happens losses are going to be higher than they otherwise would have been. 

Share This Article: