Idea to incorporate savings rate into credit scores wins $50,000

a savings credit score could increase the U.S. savings rate

Factoring savings into credit scores won the grand prize in a contest for ideas on how to boost a falling national savings rate. Image: CC Bureau of Econoic Analysis/Wikimedia Commons

Earlier this year an asset management company announced a contest for the best ideas to increase the U.S. savings rate. The winner of the $50,000 grand prize suggested a “Savings Credit Score” that factors savings into a person’s credit score. A FICO spokesperson praised the idea but said current credit scoring models made it impractical.

Credit based on saving instead of spending

“Raise the Rate” was a contest promoted on Facebook by TIAA-CREF asking for ideas about how to raise the national savings rate to 10 percent in the next two years. The winning idea was the Savings Credit Score proposed by Johnathan Chan, a 2009 graduate of Northwestern University. By incorporating savings rates into the credit scoring system, Chan told American Public Media’s Marketplace that currently credit scores are based on spending and debt. If savings were factored in, people would be motivated to improve their chances for going to college or buying a house by tucking more money away. Chan’s definition of what would qualify as savings included investing in home equity as well as personal savings accounts.

Can a Savings Credit Score work?

To incorporate personal savings into credit scores, Chan suggested such things as reporting savings on income tax returns and coordinating credit bureaus with online financial tools such as mint.com. FICO spokesperson Craig Watts told the New York Times that banks already consider savings and checking account history in lending decisions. Since lenders don’t report that information to consumer credit bureaus, it’s not available for FICO to factor into credit scores. Watts said, however, that FICO wasn’t discounting the idea of having more information available for better lending decisions

Saving needs a shot in the arm

According to the Bureau of Economic Analysis, personal saving as a percentage of disposable personal income in the U.S. was 5.7 percent in October and has been rising since the financial crisis. A survey by TIAA-CREF released in November showed that most Americans realize saving is essential for financial security. However, 82 percent surveyed didn’t know what it takes to save and 39 percent aren’t saving for retirement. The interest rate on savings accounts isn’t helping. According to Money-Rates.com, as of July 24, 2010, the average interest rate for savings accounts under $10,000 was 0.80 percent.

Sources

New York Times

Denver Post

Marketplace

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