Weighing Consumer Credit Score Priorities

It may seem like a chicken-or-the-egg dilemma, but insiders fret over what the industry needs to prioritize: borrower education or credit rating adequacy.

Growing piles of data show more financial education efforts that create smarter borrowers benefit all. What concerns at least one analyst is that borrower credit rating systems need an upgrade, too.

During a recent press conference MBA's chief economist, Jay Brinkmann, stressed that borrower evaluation tools need to improve along with other mortgage industry processes. And that is because more than ever before borrower attitudes are determined by the structure efficacy of credit scores. Now the industry is seeing higher credit borrowers default at rates that have never been so high "and that raises the issues of credit rate adequacy," he said.

In other words, a general tendency to blame unemployment alone for these changes may not be enough. If until two to three years ago borrowers would pay first their mortgage, now their priorities and debt attitude has changed. Research findings consistently indicate homeowners would rather pay first their credit card, than their auto loan or their mortgage.

Borrowers have learned form the crisis in ways that are not so obvious.

Experian, Costa Mesa, Calif., reported in May that approximately 65% of the 20 major U.S. metropolitan areas with the highest consumer debt exceeded the national average consumer debt, which was $24,775 in March.

Seattle is the most debt-burdened city in the country with at almost $2,000 above the national average debt per consumer. It is also an example that shows how important it is to look at the whole picture when evaluating how consumers are actually managing their credit, says Experian vice president of public education, Maxine Sweet.

While Seattle ranks the highest in average debt per consumer, deeper data analytics show Seattle's consumers have very few late payments and are not maxing out their credit cards, "so they are using their credit wisely and maintaining higher credit scores."

Even though many still blame the financial markets and unscrupulous brokers who sold subprime loans and offered credit to unqualified customers for the crisis, Donna Every, a former Ernst & Young chartered accountant, auditor and author of the financial advice book "What Do You Have in Your House?" says, "Consumers are coming to their senses about their role in the recession."

While brokers "were giving insane amounts of credit to families that should never have qualified for it," consumers were signing up for those loans embracing the idea that they could live beyond their means. That is why now they are trying to learn their lessons from the crisis and avoid it in the future, Every says, by being far more careful about spending, saving and using assets they already own.

A recent Associated Press economy survey also indicates Americans are keeping an eye on debt. Two-thirds of the 44 economists surveyed said the recession helped create a new frugality among Americans by changing their spending habits.

Another reason Americans are taking stock of their assets is because they realize they may be content with what they already have, Every says, along with distinguishing between needs and wants.

"About 90% of the task of getting out of debt comes out of making a conscious decision that you're going to make it a priority," says the 20-year accounting, auditing and consulting industry veteran. The other 10% is coming up with a plan and sticking to it, using overlooked assets such as gifts, skills and abilities to earn extra income, and then work with the plan.

Experian consumer debt management tips are similar: pay bills on time, pay off overdue bills and unpaid debt, set up a budget, use credit cards responsibly, review credit reports periodically, along with keeping open unused cards as a short-term strategy to improve the credit score by lowering utilization ratios.

And those short-term strategies used by customers to improve their credit scores are not so easy to catch by existing systems including the one used by Experian.