Inflated Credit Scores Pose Real Dangers to Borrowers, Economists Say

Economists from Goldman Sachs Group Inc., a global investment corporation, and Moody’s Analytics, a finance and software services company, along with the support of the Federal Reserve research, have expressed their worries on the steady increase of consumer credit scores, suggesting that such rise poses a real danger to borrowers.

In a report in Bloomberg, debtors are at risk to find themselves with billions of dollars debt due to credit scores being artificially inflated. Since metrics don’t account for the robust economy, debtors are provided with a false estimation of their capacity to pay debts on the dot.

Photo Credit: Minh Uong/The New York Times

Cris deRitis, Deputy Chief Economist at Moody’s Analytics, explains that due to low loss rates and the ongoing competition between high-rate mortgagors, there is a relatively higher risk for borrowers with low credit scores.

The Deputy Chief Economist also added that finance solutions are given online, such as car and personal loans, are the most at risked to this type of grade inflation.

According to the same company, more than 15 million consumers with above 740 scores have been recorded this year compared to there were 13 years ago. On the other hand, less than 15 million consumers with below 660 scores were confirmed.

Now, “cracks” have already shown up through the form of an increasing record of missed payments by borrowers despite years of robust economic activity. Now, with the presence of different signs indicating economic weakness, analysts are concerned with the possibility of these records growing and leading to massive losses for investors.

In one of his interviews, Marthy Young, Goldman Sachs analyst, explains that these apparent changes in consumer score records explain why there is an upsurge in missed payments by borrowers despite low unemployment rate, high-income records, and a dynamic economy.