How Would I Design a Credit Scoring System

Posted in Credit Repair
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

Early we talked about how the credit reporting system was broken because it supports financial decisions that cost you more money.

If I could, I would design a system that benefits the consumer, not the banks (so it will never happen).  In my system a higher score would mean that I am doing better financially.

In my system, someone who pays their credit card balances in full each month would have a higher score than someone who leaves a balance.  To be financially healthy you need to pay your balances in full each month, and that’s what my scoring system would acknowledge.

I’d score someone who has lower debt service ratio (the percentage of your income taken up by debt payments) better than someone with a higher ratio. In my opinion, the lower the debt relative to your income the more secure you will be financially.

Better yet, I’d value a low credit availability to net income ratio higher than someone who has a lot of credit potential, no matter what the type of loan. The more credit you have available, the higher the risk you will use it. And the more you use debt as a source of income, the worse off you are.

I would encourage lenders to place greater reliance on the person, and less reliance on a computerized score. Reverse that thought and I would encourage individuals to shop around for someone who will consider their situation, not just look at your credit score numbers or treat you like a profit model.

In the “old days” your local banker would meet with you personally.  They knew where you lived and where you worked, and your personal character became an important consideration when granting a loan.  They didn’t care if you had four different types of loans and managed to maintain a balance of 30% of your available credit each month.  They were more interested in whether or not you had the capacity to repay the loan.

Of course it’s wishful thinking to expect we will go back to the days when you were a real person, and not just a series of numbers on a computer screen.

It is what it is, so you must look after yourself.  Don’t bury yourself with extra debt just because you think it will improve your credit score.  Borrow responsibly, and as little as possible.  That may hurt the bank’s profits, but you will sleep soundly at night, because you have rejected the tyranny of the credit score.

About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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