College essay on interest rates

[Anonymous]

I'll answer your questions in order:

1.  I assume that MOST not ALL credit card companies use FICO.  It doesn't matter which score they use but they do use a score to determine interest rates.

2.  Must be a logical argument, this is a college essay.  I have room for opinion in the first paragraph only.

3.  I mentioned racial profiling because my first sentence (introduction) is supposed to grab the readers attention and like I said above, this is my only chance to stray from the facts.  And here is what I meant by it, racial profiling involves judging someones character based on one piece of information (race) and any institution that uses a credit score as it's sole determining factor for extending credit (as many credit card issuers do) is also only using one piece of information to judge someones character.

[Anonymous]

I am only focusing on credit cards, not banks.  A bank may actually pull your credit record and review it, a credit card issuer doesn't take that kind of time.  In your post you wrote, "But I could accept that there is a market that is underserved of people whose scores aren't a true predictor of risk."  This is an excellent argument for me to use.  You could be rich and still have a lousy credit score!  Thanks for the reply.

[Anonymous]

Some excellent points!  You wrote, "The other point to consider is that a credit score is just a snapshot of someone's credit at one point in time" and I think that is an excellent argument.  Your last sentence, according to my finance class, is only half correct though.  If the credit inquiries are initiate by the consumer it will affect the credit rating but all those junk offers you receive in the mail for credit cards?  They also checked your score (well, most of the time) but it has no effect on your score.  I never did figure out how they knew the difference.

[Anonymous]

Unfortunately, I have little choice in the topic department.  I was given six to choose from and no one else was picking this topic.  I like a challenge, that's why I picked it.

I have seen the word utilization used in a couple of posts already but I do not know what it means.  Could you give me a brief description, please?

And I would like to thank everyone for your replies.  It has given me a lot to research and should make for a pretty good essay.  Luckily, it only has to be 1000 words and I have probably written that much in this forum already!

[Anonymous]

Let me modify my reply to you.  According to the limited topics that I was able to choose from, credit card companies use a credit score to determine interest rates.  This is an English class, not finance, so I am going with the assumption that MOST credit card companies use credit score as the determining factor for interest rate.  In reality, I only know that CC companies use a score to determine whether or not to give you a card.  I am not sure how they determine interest.  Haven't got that far in my research yet!  Only in week two of this class, so I have seven more weeks to finish my research and write my paper.

Thanks for the reply!

[Anonymous]

I was unaware that credit scores were not an international thing.  Thanks for the reply.

[haulingthescoreup]

Hi Duality, welcome to the forums!

It's possible (and very useful) to quote the post that you're replying to. When you hit "reply" to a specific post, and the text box opens up, you'll see a button above on the right that says "quote." Hit that, and the original post appears in your text box. Before you start to enter your reply, make sure that your cursor is out of the quoted area and back on the left-hand margin, either above or below the quote.

It sounds like you're getting some useful help, and so I'll only comment that most CCC's (credit card companies) use more than just a credit score of whatever type. They typically will also look at your internal history with that company --if you've ever "burned" them, for instance, and they'll look at your underlying credit report to see what created your score. For instance a 720 FICO score can mean someone with 6 years of history, one 30-day late four years ago, and very few balances reporting (= a good customer), or it can mean someone who had a 795 three days ago, and a collection just hit the report.

I realize that this is an assignment for an English class, not a finance class, but if only for your own future info, you should be aware of the above. 

[snowangel]

Duality - i think you misunderstood my last point.

When someone is shopping around for a mortgage or car loan, they often have their credit pulled mulitple times by different lenders, these hard pulls often get consolidated by CRAs so that they don't end up with a ton of hard pulls on their report just for trying to find the best financing deal.

When they are shpping around for credit cards, they might apply for cards with several different companies and see what they are approved for (different APR or product type) but not necessarily open up each  account that they applied for.   Each hard pull remains on that person's report and is factored into their score regardless of whether or not they open the accounts or not or were even approved.  

The preapproved/prescreened offers that you receive in the mail come from that CRAs give to credit card/insurance companies.  A CCC probably pays the CRA for a list of people who meet certain requirements (ex, credit score of 700 and no collection accounts).  That's why they're not a guaranteed approval since other factors are often considered.  Many people, like myself, don't want the constant junk mail and have opted out so whether they qualify or not,, they'll never receive those offers in the mail.

[Walt_K]

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@snowangel wrote:

Duality - i think you misunderstood my last point.

When someone is shopping around for a mortgage or car loan, they often have their credit pulled mulitple times by different lenders, these hard pulls often get consolidated by CRAs so that they don't end up with a ton of hard pulls on their report just for trying to find the best financing deal.

When they are shpping around for credit cards, they might apply for cards with several different companies and see what they are approved for (different APR or product type) but not necessarily open up each  account that they applied for.   Each hard pull remains on that person's report and is factored into their score regardless of whether or not they open the accounts or not or were even approved.  

The preapproved/prescreened offers that you receive in the mail come from that CRAs give to credit card/insurance companies.  A CCC probably pays the CRA for a list of people who meet certain requirements (ex, credit score of 700 and no collection accounts).  That's why they're not a guaranteed approval since other factors are often considered.  Many people, like myself, don't want the constant junk mail and have opted out so whether they qualify or not,, they'll never receive those offers in the mail.

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Slight clarification.  The inquiries are not consolidated.  You still get all of the inquiries on your report.  However, if they are coded properly, the FICO scoring algorithm treats them as a single inquiry.  Anyone looking at the report would still see multiple inquiries.  I'm pretty sure that is the way it works.

[Jazzzy]

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@Anonymous wrote:

Well, obviously I would be writing from the point of view of a consumer as opposed to a credit card company exec. or financial genius.  It woud be easier to explain why using a credit score is the only fair way to determine risk factor but where's the fun in that?

1.  Credit card scores vary based on the reporting agency and consumers have no control over which agency credit card companies get their score from.

2.  There is no leniency (I.E. the difference between a credit score of 759 and 760 can be thousands of dollars in interest)

3.  Credit scores remove the human element.  A credit score does not care if you broke your foot and was out of work for six weeks.

4.  Being 30 days late on a payment can affect your credit score for years.  It takes years to get a good credit score but only one month to ruin it.

These are just a few of the arguments I plan to use in my essay.  I would like to hear more for/against using credit scores as the single determining factor for evaluating risk.  I haven't written my opening statement yet but I plan to compare using credit scores to racial profiling in airports!  That should get the readers attention!!!

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Are you sure that using the example of racial profiling in airports is the way to go for comparison? I travel a lot, and in my opinion racial profiling in airports is avoided as much as possible. When there is an example of racial profiling these days, it makes headlines. I don't think it's happening as much as you think. I'm sure it did in the past, but it's being avoided today. I'm a 61-year-old Caucasian female...not even 4' 11" tall. I am very often the one chosen for body scanning. I'm about as far from the racial profile as you can get. Most of this is randon these days. Last time we flew overseas my husband was chosen randomly. If I read your opinion containing "racial profiling in airports," I would think you were out of touch with today's reality, and I would not give much weight to the rest of your arguments.

Just my opinion on your original premise....

As for the rest of your argument, credit scores are only one factor in setting interest rates. I believe income plays an important part. When you apply for a credit card, they ask for your income. I know you have to stick to the premise you chose, but I don't believe the original premise is totally accurate to begin with.