Last week I asked all of you: Is the credit score a useless tool to determine risk? The real estate pros have spoken, the majority think (66%) think that the credit score is not the best tool to determine risk, while 34% still think that the credit score is useful.
The importance of the credit score
I thought the survey results were interesting with the majority of respondents agreeing that the credit score is not as useful as it has been historically with the changes in the market/government regulations. Essentially items are being cherry picked to be on the score, for example student debt and medical debt was not included in the score for many years. Furthermore, buy now pay later are not factored into the riskiness of the borrower. All of these changes have led to a loss in confidence of the credit score being the best predictor of risk.
Two key themes on credit scoring models from the survey
In the comments there were two key themes that kept resurfacing in the comments.
- Accuracy questionable due to loopholes: “The world‘s full of loopholes and ways to manipulate everything and the credit score is too easy to elevate nowadays”
- Penalizing “good” credit habits: “Perfect repayment, cc’s used for over $20,000 monthly and balance paid in full every month for more than 10 years. Credit score dropped over 100 points because my spending increased for 2 consecutive months. Never late never over credit limit.” Essentially this comment writer used credit responsibly and did not use buy now pay later loans and yet was still penalized the way the current scoring models work
Are credit scores the best indicator of riskiness?
The survey respondents quickly keyed into the issues with credit scores with 66% saying they are no longer useful. The credit score debacle is just the beginning as the grade inflation of credit scores has compounded the risk to the entire mortgage market and other debt markets that eventually will be paid as we are just beginning to see. The scary part is that there is no way to fully quantify the risk to credit quality due to grade inflation other than I know it is a big number. As Warren Buffet famously said “ you never know who is swimming naked until the tide goes out” We will have to wait and see who is the most exposed when the economy turns, but I can guarantee there is a lot hiding under the water that we don’t know about yet due to the reliance on outdated scoring models that have been cherry picked to artificially inflate scores.
Additional Reading/Resources:
- https://www.fairviewlending.com/is-your-credit-score-useless/
- https://www.fairviewlending.com/interest-rates-jump-again-are-they-going-to-decline/
- https://www.fairviewlending.com/rates-make-a-u-turn-should-you-panic/
- https://www.fairviewlending.com/will-mortgage-rates-fall-in-2026/
- https://www.fairviewlending.com/where-should-you-invest-in-real-estate-in-2026/
- https://www.fairviewlending.com/fed-drops-rates-why-did-mortgage-rates-barely-budge/
- https://www.fairviewlending.com/phantom-debt-soars-what-does-this-mean-for-real-estate-2/
- https://www.fairviewlending.com/never-buy-a-residential-condo/
- https://www.fairviewlending.com/the-war-on-landlords/
- https://www.fairviewlending.com/house-prices-hit-another-record-should-you-even-care/
- https://www.fairviewlending.com/root-cause-of-real-estate-price-declines/
- https://www.fairviewlending.com/will-real-estate-fall-to-2020-values/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends 😊. I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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