Do Credit Scores Mislead Lenders?

NEW YORK -- Lenders have often touted high credit scores as an indication that increasingly risky loan products are not being handed out indiscriminately, but one analyst at an independent research firm here says those credit scores may not be as predictive as lenders think.

CreditSights sees evidence of credit score inflation in recent years. And after years of impressive credit performance even as debt levels rise to record levels, analysts at CreditSights say they see signs that consumers are due for a "correction in their debt repayment behavior."

And it's not just credit card companies that will feel the pain. In fact, CreditSights believes that mortgages, despite being "at the top of the food chain," could drive weakness in consumer credit quality. And the "bull market" in housing may have masked some potential problems in recent years.

While lenders have reported seeing improvement in credit scores in recent years, CreditSights suspects that the credit score providers may have experienced gradual score "inflation" over the past decade, and especially during the past five years. That means the mean credit score has elevated, even as consumer debt burdens grow and risky loan products gain popularity.

Credit score providers such as Fair Isaac & Co. and the credit bureaus aren't offering much help in refuting the charge, Dave Hendler, an analyst with CreditSights, told MSN.

"They don't really discuss how they come up with these scores in much granular fashion," he said.

Particularly as the scores have evolved - FICO has revamped its scores several times in recent years - Mr. Hendler suspects the systems are looking at more data with an eye toward approving more loans, rather than as wholly impartial judge of credit.