This story from Felix Salmon of Reuters discusses a short-term credit customers’ borrowing experience and that of her relationship with a credit union of 15 years. Interesting findings from him in the discussion of a borrower’s credit score:

Hal James (CEO of Missouri Credit Union) works on changing “poor management of money that they’ve got”. The credit union, he said, will “work to get the savings started”, rather than add more debt: “if you think that you have to borrow more money to improve your credit score, that’s not a solution. It’s not going to work.”

Sadly, James is wrong about this. The information going in to your credit score includes absolutely nothing about your salary, or your savings rate, or any of your assets. Let’s say that I defaulted on a lot of loans five years ago, which ended up being charged off; since then, I’ve avoided all credit, got a high-paying job, lived within my means, built up my savings — and inherited a million dollars to boot. What happens to my credit score? Very little. As the bad loans on my credit report drift ever further into the past, they will have a slightly less negative effect on my credit score. But without anything positive on there, my score will remain abysmally low indefinitely.

James told me that “you can go from 500 to the mid-600s if your bad credit drifts far enough behind you”. I checked this with FICO, and it’s just not true. Once you have a bad credit score, the only way you can make a significant improvement to it is to borrow money and pay it back.

As it pertains to access to credit, and why borrowers choose to go with short-term lending products, Salmon said this:

Is it a good idea for the professor to be taking out loans at 40% interest rates? Really, she didn’t have much of a choice. She needed the money, she got precious little help from her credit union, and the loan company was friendly and extended her the cash on terms she could afford.

What’s more, the professor’s relationship with World Finance has indeed improved her credit. Since taking out that first loan, she’s obtained two different credit cards, and also bought a brand-new BMW with 2.9% financing. All with essentially no help at all from her primary financial institution, which is Missouri Credit Union. The debt the professor is taking on may or may not be wise, given her unique individual circumstances. And the credit union could in theory be a valuable resource in terms of helping her work out whether, for instance, she can really afford that car. But the relationship there is broken, and I see no chance that it will be fixed.