With all the news and economic impact of the sub-prime mortgage loan fiasco and the associated credit card crisis, one would think financial institutions would have tightened up their approval processes for new lines of credit. A recent experience doesn't give me much confidence in that.
I'm planning to upgrade my PC (new processor, motherboard, memory, etc) so I can finally get decent frame rates on Crysis. My preferred online tech retailer is Newegg, which consistently has great prices as well as an active community of customers who provide feedback about their purchases. Yesterday I opted to apply for a "Preferred Account," which is basically a company-specific credit card that offers various purchase promotions. I filled out the necessary info (after checking to make sure the site was secure!) and was stunned that I received instant (well, in no more than 10 seconds) approval for a credit line of $8000. Since it was Sunday and I doubt the credit department is fully-staffed on that day, the company obviously uses some automated process. Was it just a quick check of my FICO score or some complicated algorithm that led Newegg (or more importantly, its partner CIT Bank) to decide I was trustworthy enough to be extended a line of credit? And what about identity theft?
Fast forward to this morning when I receive a call to verify that I did, in fact, open a new account with Newegg. I had provided my telephone number in the application, and as a fraud prevention measure, the call seems reasonable and appropriate. Except the rep who called asked no further questions, thanked me, and hung up. Couldn't an identify thief just as easily answered the question - and truthfully - as long as the telephone number on the app was his rather than mine? I've grown accustomed to answering all kinds of security questions on-line and off to confirm my identity; good thing I can remember every address I've ever lived at and the name of my elementary school. While it can be a hassle, it's also reassuring to know my financial institutions have implemented steps to decrease the likelihood of fraud.
But what are these firms, many of whom have shown such poor judgment recently in extending credit, doing to verify the veracity of the information provided in credit applications and the creditworthiness of the applicant? Consumers have grown so accustomed to easy credit that many of us would balk if asked to provide actual documentation of our assets or other intrusions on our privacy. Credit scores are a record of past bill-paying behavior and as such are a lagging indicator of one's current financial situation. Moral hazard and adverse selection have always been central considerations in risk management for financial institutions. If credit scores are the defense of choice against these, then it behooves us all to make sure the info they're based on is accurate. Maybe it's time to request a copy of my own from Equifax, Experian, and TransUnion