Credit scores are usually touted as the most efficient and effective way to predict the possibility that consumers will default on their credit obligations. Aside from the fact that increased automation relying solely on numbers has caused numerous problems (mainly by excluding the human element, aka common sense), credit scoring and credit reporting companies occasionally break through the pretense of ’risk calculation’ to openly expose an important function they serve in the credit industry – the Strong Arm, the powerful agent of manipulation and control.
The message when this happens? Play by the banks’ and financial institutions’ rules or lose your access to money, financing and opportunity.
This is not simply an issue of ‘Pay your bills on time’, no one disagrees with that. If you don’t pay your bills you shouldn’t get credit or should only get it at a higher price. The problem is that an inaccurate, inefficient and misleading credit reporting system can often lead unfairly to lower credit scores which in turn raise the costs on otherwise creditworthy borrowers. This means numerous people are paying hundreds if not thousands of dollars each year unnecessarily in fees and interest, while others are denied credit or employment opportunities altogether.
Another problem is being forced to stay in bad situations no matter the financial, personal and emotional toll. Try to get out of a bad situation and you can get penalized, often for years! And not only will your credit score be seriously damaged, you will have to put up with the hypocritical moralizing of the banking industry as they try to shame you into staying in a bad situation (so you can keep paying them of course!)
Recent changes in credit scoring show this clearly. As strategic defaults have increased dramatically over the past couple of years FICO and VantageScore are changing their scoring models to help flag potential cases. This in itself isn’t bad, especially if it can lead to loan modifications….but let’s be honest, we all know that is not going to happen. What this will lead to is restricted access to loans and financing for more and more people and higher penalties for those walking away from bad investments. Fannie Mae has jumped into the game and unveiled extremely harsh penalties for anyone who walks away from a loan strategically.
It’s okay for the Banks and Mortgage Bankers Association but not you!
“Buying a home is the biggest investment you will every make.” ”Your biggest asset will always be your home!” Phrases like these resonate with the American Dream and the image of a white picket fence ingrained in us over the years. However, if your house is an ‘asset’ or ‘investment’ then why do the banks and financial companies get upset when people treat it as such? Who in their right minds would consider holding onto ‘investments’ or ‘assets’ that tank in value, lose money, and are worth pennies on the dollar for the loan currently being paid?
The answer to this question is enlightening – those walking away from bad investments and bad assets include banks like JP Morgan Chase and organizations like the Mortgage Bankers Association! That’s right, the very companies that moralize and try to shame everyday people into keeping bad investments (for decades!) walked away and strategically defaulted on financial obligations they had formally committed to. The hypocrisy is breathtaking!
This video says it all.
When your house is worth half of what you paid…
Would you pay $1 to buy 50 cents? This is what many people are being asked to do through no fault of their own. The housing market crash put people in situations they never would have foreseen.
If you live in a place where the only way to sell your house is through a short sale then you will be penalized for years to come. This in itself is probably the most unfair and abusive tactic out there today – there is a distinct difference between not being able to pay your bills (whether the loan was predatory or not) and having to short sell just to get out from under the loan, and living in an area where the market collapsed and having to sell your house when it is now worth half of what you paid.
Yet both are penalized equally.
The moral? Stay in your bad investment and suck it up, and keep paying! But clearly it is important to break through the rhetoric and see the situation for what it really is.
What’s the moral of the story?
Everyone needs to fairly evaluate their situation and through a consideration of all the factors involved make the best decision for them and their families. Hypocritical moralizing and self-serving half-truths propounded by the banks and financial institutions should be seen for what they are (and therefore properly ignored). But then again the abusive system in place carries harsh penalties for certain actions such as strategic default, so these consequences must also be taken into account. In many situations it will be worth mailing the keys back to the bank and cutting your losses, other times it won’t.
But whatever happens be sure to take charge and make an informed decision in your best interests.