One of the unfortunate effects of our corrupt and paralyzed political structure is the “drowning out” effect, sometimes described as Washington “sucking the oxygen out of the room.” While our attention is fixated on the more dramatic consequences of our national government’s “brokenness,” we fail to notice the harms being done by the multitude of problems that government is simply not fixing.
There’s no doubt that credit card companies charge excessive rates of interest. But as scholars at the Brookings Institution point out, simply legislating a cap would actually compound the problem.
When does the interest rate a lender charges cross the line from economically justified to immoral? Societies have struggled with this question since biblical times. Last week, Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) took a crack at this puzzle, proposing to cap credit card interest rates at 15 percent. They’re concerned that the U.S. credit system traps working families with unsustainable debt. We share their concern, but their proposal uses a blunt instrument to attack a nuanced problem.
The Loan Shark Prevention Act, as the new legislation is called, is likely to hurt the people it’s designed to help, driving the market away from consumers with low credit scores. Some people may have their interest rates reduced, but many would no longer have access to credit at any price. Banks have been clever in figuring out how to hide credit in fees, as anyone who has paid $35 for an overdraft knows.
Instead, the authors propose making affordable credit accessible to a much larger group, by fixing what they identify as “the flawed scoring system that allocates credit.”
Our current system decides who gets credit and at what price using algorithms that analyze a person’s credit history and calculate a credit score. FICO, the most common credit score, employs a range between 300 and 850. There is no universally accepted definition of what constitutes a prime or subprime credit score but, generally, people with scores above about 680 are rewarded with cheap credit and high borrowing limits. Those classified as either near-prime or subprime, whose scores largely fall below 680, have a tougher time accessing and paying for credit.
The apparent objectivity of the algorithm masks a whole host of issues. A peek behind the credit-scoring curtain reveals that, as in “The Wizard of Oz,” there are humans feeding imperfect information into the machine. You could be the most creditworthy person on the planet, but if you lack a credit history, are a young adult or a recent immigrant, or had financial hardship in the past five years, your score will be low. Credit reports are rife with errors: One out of 5 Americans has a material error on their score.
I recently encountered this precise circumstance with my granddaughter-in-law: she is young and had virtually no credit history. It wasn’t bad credit, it was no credit, because she had been prudent and avoided debt. No credit became a real problem when she and my grandson applied for a mortgage. (Even more maddening, one of the three reporting agencies kept telling the bank her credit was “frozen”–whatever that means–but continued to insist to her, during her multiple calls to correct the issue, that it wasn’t.)
The Brookings scholars write that “Congress should start examining this system and aggressively pushing for its improvement.”
Lawmakers should push for credit-scoring formulas that take a wider range of data into consideration. Paying a mortgage on time improves your credit score, but paying your rent on time does not, because mortgages are tracked and rents generally are not. That’s just not fair…
The Consumer Financial Protection Bureau estimates that 45 million Americans lack the data that credit bureaus use to create a credit score. If you don’t have a score, it can be very hard to get a loan, rent an apartment or persuade an employer to hire you. Credit scores have become an essential component of what Princeton sociologist Frederick Wherry calls “financial citizenship” — the ingredients necessary to participate fully in the economy and civil society.
If we had a functioning Congress, this is one of the multiple tasks to which they should attend. But of course, we don’t. Right now, Mitch McConnell (aka the most evil man in America) is preventing the Senate from even considering one hundred bills that have been passed by the House.
We have a legislature that is incapable of doing anything, and an Administration trying its best to undo what was accomplished in the past. We aren’t even a banana republic: we’re a failed state.