Incorporating savings rates into personal credit scores?
TEXT OF INTERVIEW
TESS VIGELAND: We’ve been asking for your financial New Year’s resolutions here on the show and on our Facebook page. One common theme in your answers is that you resolve to save more. Excellent goal, one that most of us should pursue. But saving doesn’t come easy to Americans. And because of that, the retirement company TIAA-CREF recently held a competition for ideas that would prompt people to save more. Jonathan Chan won. He’s a recent college grad. And we agree wholeheartedly with his winning entry.
JONATHAN CHAN: My idea was to incorporate savings rates into the credit scoring system in the United States today. I thought the idea would promote savings because people are absolutely interested in their credit scores because it affects their ability to buy a home, borrow money to go to college, and be able to just borrow money in general. So I thought that incorporating credit scoring would make the borrowing base better. It would identify lenders who are better borrowers.
VIGELAND: Well, it’s really interesting because the vast majority of your credit score now is based on debt and whether you’ve paid off your bills, and how much debt you have, and how much your credit card utilization is, and that sort of thing. There really isn’t much about saving, is there?
CHAN: Absolutely. Every aspect of the credit score has to do with spending. You have to build a credit history, you have to maintain a lot of different credit lines. One large aspect was to get as many credit cards as possible. So the person with the most amount of credit cards actually has a higher credit score.
VIGELAND: Yeah. The person who dies with the most credit cards wins, right?
CHAN: Exactly. So I thought those aspects were kind of anti-saving.
VIGELAND: I’d say they’re totally anti-saving.
CHAN: Yeah, absolutely.
VIGELAND: So why was this something that you were thinking about?
CHAN: While I was in college, my first experience with credit scoring was getting my first credit card, essentially. I learned more about the credit scoring system and I wanted to improve it — not because I wanted to buy a home any time soon, but I just knew any part of financial health had to do with having a high credit score. So doing more research, I realized that every aspect of the credit score had to do with spending and I thought that system does not reward saving. And once I saw the contest by TIAA-CREF I knew that this was a system that could benefit from incorporating savings rates.
VIGELAND: Well how specific did you have to get for the contest? Did you get as far as trying to design this for the folks at FICO, at Fair Isaac?
CHAN: I did mention a few ideas. I thought incorporating it into the tax system was a possibility.
VIGELAND: How?
CHAN: I thought that a few extra items included into the tax system could possibly calculate a savings rate. I guess everyone has an idea of how much they save, but they can’t really put it in a number right now. And I think a few extra items on your annual tax income could possibly do that. And I also suggested, I guess a voluntary system through like a financial tool. I suggested Mint.com and I said a tool like that could possibly calculate a savings rate and contribute to a credit score.
VIGELAND: Would your calculations, for example, take into account how much home equity you have? Which a lot of people consider that a form of savings as well.
CHAN: My idea definitely hinges on the fact that savings is not just cash. Placing money in a savings account is not savings, it can be part of savings. I wanted to stress the fact that to be able to invest in home equity is absolutely savings and I think that my idea hinged on that too. And I think that in this economic environment that was kind of crucial because the real estate market was so depressed and something that would improve that would be a winning idea.
VIGELAND: May I ask how your credit score looks these days?
CHAN: I actually got my first credit card when I was a freshman in college, so my credit history is limited. And I think the only way, at this moment, for me to do that, would be to keep spending, so I think that needs to change. Otherwise, I’ve never been late on a payment, I’ve never gotten into significant debt. So I think I have a decent base for building my credit score from now on.
VIGELAND: And you won $50,000. You know how you’re going to spend that money?
CHAN: I’m going to try to put my money where my mouth is. I want to save some of it. I do have some student loans outstanding, so I’ll probably try to pay some of that. But I just found out about winning, so I haven’t really made too many plans yet.
VIGELAND: All right. Well Jonathan Chan, congratulations. And I love this idea, so I hope it absolutely launches you and gets some of us who are good savers a better credit score. That would be great.
CHAN: Yup, I hope so too.
VIGELAND: Thanks so much.
CHAN: Yup, thank you.
VIGELAND: We asked the folks at FICO what they thought of Jonathan’s idea. They told us it was a novel idea that they’d be interested in exploring. But right now they don’t have a way to calculate consumer savings. Their numbers are based on information they get from lenders and the credit bureaus, who of course, are only interested in what you borrow. Ball goes to you, Equifax, Experian and TransUnion.
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