< HOME  Friday, November 18, 2005

Why Does Your Credit Score Drop When You Shop?

Fred Bieling has this to say about credit ratings:
"I'm no economist, but what I want to know is how a person can have his credit rating lowered every time he or she shops around for something, cars, car insurance, anything in which credit is checked. I know what the answer is, it's been explained to me that shopping around raises a red flag with creditors.

That excuse is bullcrap. It's economic discrimination. If you have an 800 credit score, your pretty much going to get the lowest intrest rate possible. But if your in the 600's for whatever reason, your going to take a bigger hit if you even try more than two or three car dealerships to get an accurate idea of what your monthly payment is going to look like.

That is not fair. That's the problem I have with interest.
My reply:
"That's a brilliant observation, Fred. It makes perfect sense now.

The trouble starts when the government gives the banks exclusive access to the money, but then it gets terribly wrong because bankers take advantange of this monopoly by charging INTEREST.

So, the whole system expects you to pay in CASH; but in order to get some CASH, you have to pay more CASH, a.k.a, INTEREST!. You simply have no access to cash without interest!

So of course, once they see that you need some cash badly, i.e., you're shopping around and intend to borrow boatloads of money, they lower your credit rating so they can charge more interest!

You're right, Fred-- it'seconomic discrimination.

We want economic justice, for a change."
In fairness, there are dissenters. Jim Bradley has a different take on interest.

You decide what makes sense to you.


At Saturday, November 19, 2005, Anonymous Anonymous said...

This is not entirely true. For example, the credit scoring models will only count one inquiry within a 14 day period if you are in fact shopping for a mortgage or an auto loan. So comparison shop all you want within this window of opportunity, it will not impact your credit score.

Excessive inquiries other than those mentioned above do, however, have a negative impact on your overall score. Each inquiry drops your score approximately two points. Lenders don't like multiple inquiries simply because it appears as though you are desperately shopping for credit in order to "stay afloat" by robbing Peter to pay Paul, so to speak.

Overall, however, inquiries have a very small impact on your credit scoring model. The major factors that impact your score are negative items such as late payments (30, 60, 90 days...), collections or charge-offs. The other and most common impact on your score is your proportion of balances to limits. Ideally, you would like to see your credit balances not in excess of 33% of your credit limits. Thus, even if you've made all of your payments on time and have never had any collections or charge-offs, your score will still suffer greatly by simply being "maxed-out." The more unused credit you have available indicates a sign of fiscal responsibility and discipline. Therefore, any time you have the ability to have your credit limits increased, take it. It will lower your overall proportion of balances to limits and thus raise your score.

Just a few ramblings from a thirteen year mortgage banking veteran...

At Saturday, November 19, 2005, Blogger qrswave said...

Thank you, Anonymous. It's great to get feedback from someone with your experience.

And I'm sure many readers can make use of your thoughtful tip on credit limits.

However, I'd be remiss if I didn't point out that I am categorically against interest because of the nature of the relationship between lender and borrower (the inherent conflict of interest) and the markedly decreased risk associated with lending as opposed to equity investing. The details of how interest is tweaked to minimize risk and maximize gain is not a key issue for me.

Interest is second nature to you because you've been in the business so long. I'm curious to hear how you view my position.

At Sunday, November 20, 2005, Anonymous Anonymous said...

Well it seems we have already exchanged opinions on Alternet.org (my pseudonym is billfaster). I have no problem with the free exchange of opinions and ideas, however, I cannot tolerate the way in which opposing points of view or simple disagreements ultimately lead to unnecessary personal attacks.

That being said, I simply don't follow the logic behind your argument. Almost every loan made today is ultimately blocked together and securitized for sale on the secondary market. It is the interest payments that determine the underlying value of the instrument being marketed. These new securities are then sold off to large institutional investors such as pension funds which in turn provide the seller with the liquidity to make more loans.

How would a non-interest based economy work? If the banks are unwilling to asses interest charges, then where is the incentive to lend the money - through equity participation? How long do you think it would take for the money supply to dry up if each lender had to take an equity stake in your car or home, for example. Their capital would be indefinitely tied up. Where does the new liquidity come from? Obviously not you or me as what incentive would we have to put money in the bank if they are not paying us interest to do so. Where do the risk averse investors turn? What about the elderly and retirees who feel comfortable with CD, money market and Treasury returns? The democratic platform against private social security accounts runs contrary to your very argument as they claim that equity participation is much too risky...

At Sunday, November 20, 2005, Blogger qrswave said...

Thanks, Bill, for your thoughtful comment.

Your concerns are valid. Circulation is the whole point of introducing currency into an economy.

"Where is the incentive to lend the money?" The only wholesome place it can be, from the profits of equity investing.

"How long...would [it] take for the money supply to dry up if each lender had to take an equity stake in your car or home... Their capital would be indefinitely tied up." By definition, capital is invariably "tied up" once it’s invested in an asset like a home or a car. The only thing interest accomplishes is it transfers an excess portion of the borrower's earned income (which is not "tied up") to the lender, and so on and so forth, to infinity.

And, what do you think the lender does with all the interest that's collected? Most of it the lender can't even spend! It is just too much money!!! So, he lends it to others and others, etc., etc...

Where does the new liquidity come from? Where it’s supposed to come from when there is an increase in a nation's productive capacity--the government press! That's why it's created. The government need only make sure it does not print too much, which is easier to do when there’s no interest than when you have to keep track of principal AND interest.

Where do the risk averse investors turn? I know it is difficult to imagine now because we live in an interest laden society. But, risk averse lenders will invest their money in the ways that are available to them, just as they do now. Only interest bearing loans won't be one of them. Margrit Kennedy presents some creative suggestions to give people incentive to circulate their cash.

Finally, of course equity participation is very risky!!! That which is taken must come from somewhere.

Interest based lending has evolved into a little to NO RISK activity. Simply, it is unnatural. Risk is inherent in life. You cannot eliminate risk, you can only transfer it--from lenders to equity investors!

Restore the balance and equity investing will no longer be as risky as it is now.

Thanks a lot, Bill! I didn't think about it this way until you asked me!

Thank God for the internet, and thank God for people like you who are ready to talk!

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