Theres something strange in the neighborhood. Who ya gonna call? Credit busters! The reality is that banks and credit card companies have suddenly taken to increasing interest rates and reducing the credit limits on existing lending facilities. According to the figures, nearly half the US banks reduced the limits on credit cards in the last quarter of 2008. The result is easy to see. Whether you are a good or bad borrower, your credit score is dropping. Why should this happen? One of the more important factors in setting the score is the ratio between the amount you borrow and the amount available to borrow. If the amount of credit is reduced, you are closer to your limit. This makes you look like a bad risk and the score falls. This would be true if you were recklessly increasing your borrowing, always close to the maximum allowed. But there is something seriously wrong with the formula for calculating the score when the customer has done nothing wrong. Its hurting the good customers more than the bad because there is serious collateral damage. If credit scores were only used by banks for internal purposes, customers might weather the storm. But employers, landlords and, most importantly, insurance companies also use the scores to decide who is a responsible and reliable member of the community. According to the Society for Human Resource Management, half the nations employers routinely use credit scores when recruiting. The majority of insurance companies use scores when setting premiums for driving on the road. For some reason these companies have never been able to explain, they believe that people who have poor credit scores cannot drive safely on the roads. This is odd. If people cannot afford to replace their cars, they probably drive more carefully to reduce the risk of an accident. California, Massachusetts and Hawaii already have laws banning the use of credit scores for auto insurance purposes. A number of other states are proposing legislation to limit or outlaw the practice. As an aside, Maryland has a ban in place for home insurance purposes. In addition to its general unfairness, the use of credit scores is also potentially discriminatory. The problem is that people who have low incomes tend to have low scores. This concentrates poor scores among some minority groups. Civil rights campaigners suggest that African American and Latino drivers with low credit scores face unlawful discrimination on the basis of race or ethnicity. Naturally, the auto insurance companies deny this but, citing commercial confidentiality, refuse to produce any detailed data that would allow the issue to be settled one way or the other. As a result, the poor and disadvantaged are left with the feeling they are being victimised. What is interesting in all this is that insurers continue to be profitable in the three states where credit score use is banned, suggesting that the continuation of the practice is based on convenience. A computer can take data, apply a formula and produce a premium. If human beings had to look at files and make decisions, this would be more expensive and eat into profits.
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