ECONOMICS: Credit Scores do not accurately measure someone's financial abilities.

Have you ever been denied a loan or an apartment rental because of your credit score? Or maybe you've wondered why your score dropped even though you've been paying your bills on time? These questions touch on a debate that's been growing in recent years: Do credit scores really reflect our financial capabilities?

Before we dive into the debate, let's understand what credit scores are and where they came from. Credit scores were introduced in the U.S. in the 1950s by the Fair Isaac Corporation, now known as FICO. The goal was to create a standardized way for lenders to assess the risk of lending money or extending credit to individuals.

Today, the most widely used credit scores in the U.S. range from 300 to 850. They're calculated using complex algorithms that consider factors like payment history, amounts owed, length of credit history, new credit, and types of credit used. The three major credit bureaus - Equifax, Experian, and TransUnion - each produce their own scores based on the information in your credit reports.

According to a 2021 survey by Credit Sesame, 55% of Americans have been denied credit due to their credit scores. Meanwhile, the Consumer Financial Protection Bureau reports that about 26 million Americans are "credit invisible," meaning they have no credit history with a nationwide consumer reporting agency and are more likely to be denied credit as compared to even those with a low credit score.

It's crucial to discuss the value of credit scores because this impacts many aspects of our financial lives. These scores determine whether we get approved for loans or credit cards, what interest rates we're offered, and even affect our ability to rent an apartment or get certain jobs. As you go through life, your credit score becomes one of the most important numbers you know, and you quickly learn how to manipulate it—what actions will improve it and what might harm it.

As an example, during the housing crisis of 2008, many homeowners were weighing the difficult decision of whether or not to stop paying their mortgages, basically stopping paying a loan that was being tracked on their credit history. As you might remember, this is when the housing bubble burst and millions of homes lost the bulk of their value practically overnight. Many found themselves "underwater," meaning their homes were worth less than the amount they owed on their loans.

Walking away from a mortgage, also known as "strategic default," causes a significant drop in credit score, making it difficult to obtain future loans for cars, homes, or even credit cards. However, foreclosures can be wiped from your credit report in 3-7 years leading to approximately 4.4 million homes foreclosed on between 2007 and 2010, according to the Federal Reserve. Its interesting to wonder how many of those were strategic decisions by homeowners knowing that they would just need to rebuild their credit history in order to get out from under an asset that lost a lot of value.

Agree (Credit Scores do not accurately measure someone's financial abilities):

1. Credit scores don't consider income or assets. A person with a high income and substantial savings could have a low credit score if they rarely use credit, while someone living paycheck to paycheck might have a high score if they consistently make minimum payments on multiple credit cards. But of those two people which would you rather loan money to?

2. Credit scores can be unfairly impacted by factors outside of your control. For example, there are data breaches all the time that expose the personal information of millions of people. That’s just one example of how easy it is to fall victim to identity theft and have your entire credit history collapse through no fault of your own.

3. Credit scores don't reflect the full picture of a person's financial behavior. They don't consider rent or utility payments unless they're reported to credit bureaus, which often only happens when accounts are severely delinquent. This can disadvantage renters and those who prefer to use cash or debit cards.

Disagree (Credit Scores do accurately measure someone's financial abilities):

1. Credit scores have been shown to be predictive of credit risk. A 2015 study by the Federal Reserve found that credit scores were highly predictive of future loan performance, even two years out from when the score was measured.

2. Credit scores provide an objective, standardized measure that reduces discrimination in lending. Before credit scores, loan officers often made subjective decisions that could be influenced by personal biases.

3. Credit scores encourage responsible financial behavior. The factors that go into a credit score, like paying bills on time and managing debt responsibly, are generally good financial practices.

For the first "Agree" point about income and assets not being considered, a rebuttal might go: While it's...