Credit Where Credit Is Due

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.

One of those is the way creditworthiness is measured.

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.

18 thoughts on “Credit Where Credit Is Due

  1. id prefer to look at an angle we havent beem hearing about much, going to all plastic. recent ads on t.v. about esperian etc, doing a makeover on your credit and to watch those cgi commercials pop off another rate and your car explodes into a new lambo.. truckers credit is non existant,just another revolving door, imagining your truck is broke down and you need a rental to get customers freight to them, nope, never enough credit to get a rental, now your sued by the broker who secured you that load, the shipper ,the customer waiting,his contract. though you want to do right, we cant! we deal with new start ups with this scenrio, call a broker, he has a load,but, you havent been in buisness for a year,or, you dont own other trucks. Matson is such a company. most every other broker will not, hire you if you have less than a year in buisness.. so much for being independant. i would look to how this scam where wall streets banks want full control of the cash flow,over just credit mentioned here,. removing currency i see as the biggest take over of the working class,and enslaving them to credit,and as this admin is working,maybe cutting that plastic off if you dont go with thier,flow!…best wishes..

  2. Sheila,

    “We aren’t even a banana republic: we’re a failed state.”

    What’s next? Will it be Civil Warfare? That seems to me to be the only logical conclusion.

  3. credit: belief or confidence in the truth of something; trust

    credit: confidence in a buyer’s ability and intention to fulfill financial obligations

    We are putting our belief or confidence in the credit card providers that they will actually pay the costs we incur…we are giving them credit. In return they are putting their belief or confidence in the fact that actually have the intention to fulfill those financial obligations. It is, or it should be, a mutual trust system that works but the continuing increase in interest rates are basically to pay the debts of those who do not honor their financial obligations. We are paying their bills for them but there must be a stopping point; I learned that banks do not attempt to seek out the dead-beat debtor or the criminals who use stolen credit cards. Obviously that endeavor would be cost-prohibitive. Enter public safety and prosecutors who are being paid to find the criminal element to stop their activity and hopefully seek payment but this does not happen. Not even at the massive levels of indebtedness we have watched our current president avoid. But I digress.

    I do not mind a reasonable amount of interest; they are doing me a favor and deserve payment in return. There is a simple way to stop some of the ever increasing interest rate to pay debts for those who do not pay and especially for those whose criminal acts result in unpaid credit card balances. All cashiers should require a photo ID or some form of ID; instead they look at the signature on the back of the card and the signature the customer signs…a simple matter to copy on the computer box which distorts the signature. This is totally legal; I researched it.

    An example of being listed as a poor credit risk, even temporarily, happened when I was attacked, injured and robbed on my driveway one morning. My Walmart credit card was used 5 times within a few hours in nearby businesses…with IMPD undercover officers following them. My card was cancelled ASAP by my daughter-in-law and a new card requested. The first bill on the new card contained the hundreds of dollars charged by the 27 year old getaway driver, I was 77, a photo ID or ID of any kind would have stopped it. I sent copies of police, court documents and news items to explain the charges; bill number 2 on the new card showed the same balance due but $0.00 payment due. Problem solved, right? Wrong! Syncrony bank who holds Walmart cards reported me to THREE credit reporting bureaus for non-payment for five months before clearing my name. I cancelled my Walmart card as soon as my name was cleared.

    This mattered NOT to the bank, Walmart or the government at all levels; requiring ID is too tightly tied to voter registration control, gerrymandering, elections and the Electoral College and maintaining Republican majorities. Hard to believe my little mugging was so vital to the ongoing control at such high levels.

    “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.”

  4. In all fairness regarding credit rating I must add that PNC Bank, who holds my VISA credit card, immediately acted. Mugged on Monday morning and by the end of that week the PNC Fraud Division had cleared my credit card of the criminal’s charges, thus clearing my name. Of course they made up that loss via those rising interest rates on all card holders.

  5. Let’s look at another part of our credit system that needs attention. 45 and his family control over 500 LLCs. When any one of them starts to feel the squeeze of creditors clamoring for payment for services rendered, well just file for bankruptcy. The debt gets discharged. The creditors are out in the cold and everyone just moves on. It is abuse of the system, but it is all perfectly legal.

  6. Sanders and AOC are smart…I’m sure their bill addresses more than capping interest rates. I just received notice from Chase that they’ll be assessing a “fee” for every purchase. Guess which card I won’t be using anymore. A fee for purchases and high-interest rates equals lost business.

    I’m more interested in the Public Banking option, but as you said, our corrupt and inept “public officials” will block all attempts, which is why we have to build a parallel system. It’s happening everywhere.

    A move to credit unions is one way to fight back, but many of their CEOs want to act like big banks.

    The Roosevelt Institute and many others have been working on this option. From a 2018 article:

    “In particular, A Public Banking Option As a Mode of Regulation for Household Financial Services in the United States argues for a public banking option that would directly compete with the outsized (and often predatory) power of the private household financial services sector in two ways. First, the federal government would directly provide households with basic transaction services and consumer credit. This would ensure that all communities have access to basic financial tools, such as checking and savings accounts, check cashing, direct deposit, and online banking, as well as to small loans, auto loans, and mortgages.

    Second, the public bank would manage an online financial services marketplace, creating an environment where public and private financial goods would directly compete alongside each other. This second component would serve as a powerful regulatory tool by allowing the government to condition sellers’ access to the marketplace based on certain consumer safety standards. Consumers could also rate and review sellers, fostering easier detection
of consumer abuses. A public banking option structured with these two components would create the financial infrastructure required for universal service, while also preventing consumer financial protection abuses through public-private competition.”

    http://rooseveltinstitute.org/public-banking-option/

  7. I have to give Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) an “A” for effort.

    Back when I took finance classes in College, including a course in banking, the class was told the interest rate on a loan had several components. Among the components were the rate of inflation, the banks expenses (such paying personnel, etc.), a calculated risk factor based upon the person borrowing the money ability to repay the debt taking into consideration factors such as: prior loans, personal expenses, and the persons income. Finally a rate for profit was added.

    Long term loans such as mortgages were risky since many of these components or variables would change over time.

    Perhaps the need for loans and credit have increased because of income inequality and a lack of a living minimum wage.

    The single biggest reason for personal bankruptcy is medical bills, or more precisely the inability of the patient to pay the bills off, which of course impacts the credit score of that person.

  8. Two odd observations about credit and loan rates.

    1) When a friend bought her first house a number of years ago, she was penalized for not spending as much as she was approved for. She was/is an engineer and was making decent money and living comfortably within her means. She could not qualify for the lowest rate despite having perfect credit. Her mortgage was “too low”. Living easily within her means and being positive she would never worry for a moment about paying her mortgage was penalized, which I find bizarre. I would have thought easily being able to pay your bill would have been a good sign and lowered your rates, not raised them.

    2) I have pretty decent credit. Near 100 points higher than what the quoted article says would qualify as prime. In yet, the Sanders/AOC bill would lower the rate on every credit card I have. Even having a good score doesn’t keep you from having 19% rate cards. Go figure.

  9. The FTC regards the absence of an active trade line a consumer report, even though it’s been argued (by one of the big 3 consumer reporting agencies) that that information alone is not enough to generate a meaningful credit score with FICO algorithms. The FTC was making the case to enforce prohibitions on using performance data for general marketing purposes (it can be used for marketing “fair offers of credit”). The CRA wanted to create a data product capable of more focused selection of consumers for marketing companies. The FTC won that round, but that left open the argument that even having no credit history is a meaningful credit score. (A bit of history from the late 1990’s there- in addition to the administrative law judge, the Gramm-Leach-Bliley Act privacy provisions tanked the argument for using performance data for general marketing purposes)

    What’s more concerning are the things other than credit performance history that might go into a credit score – social media activity, for example – and purpose other than those specified in the FCRA for which companies want to use credit scores. So yes, protective legislation should deal with what feeds the algorithms. But, that’s orders of magnitude more difficult than capping interest rates, and requires a thorough understanding of how the algorithms work. I know, I seem to be accusing Bernie and AOC of picking on an easy and obvious target (which won’t actually solve the problem intended but sells better to the masses- algorithms? Please!) and knowing better.

    As for the freeze, that might be a good thing. It’s a basic anti-fraud measure. Have your grandkids ever had a problem with identity theft? If so, a freeze might have been imposed in the midst of all that. I think you can also request a freeze as a preventative measure- just remember to have it lifted before you try to obtain credit.

  10. On the credit freezing note – I’d recommend every freeze their credit with the 3 main groups (Experian, Equifax, Transunion). It’s free to do that these days (happily, they had to stop charging for the privilege of controlling access to your own data once Experian had all their information stolen). Your probably not applying for new credit very often anyway and shutting down the ability of anyone to open a new line in your name is a pretty useful fraud deterrent. You can even unfreeze them for only a set period of time if you know you’re going to be getting an auto loan/mortgage/whatever.

    Worth the 10 minutes of effort

  11. I’m sure there are opportunities for making credit scoring more transparent and easier to fix in the event of fraud. But credit scoring is used because it works pretty well.

    JoAnn’s point could be solved by requiring a PIN for any transaction – just like your debit card. This is the way it is virtually everywhere else in the world (chip and pin). That requirement would drop fraud in “card holder present” transactions to near 0. That requirement should be legislated because card companies know how to fix the problem and haven’t for decades. Fraud costs us all more money – and it makes people targets and makes identity theft more profitable.

    I am in favor of capping interest rates at 15-17%. Yes, that would mean that some people wouldn’t get credit. Predatory lending is not helpful to the person who is borrowing the money.

    I would also put a hard limit on swipe fees / transaction fees. All of these “rewards” programs cost consumers a bundle – even the ones who don’t use credit cards. Swipe fees add about 2% to every purchase even if you don’t use a credit card. An alternative would be to prohibit contracts that require stores to charge the same price for either cash or credit.

  12. Todd; a friend told me earlier this week that our neighborhood Chase bank is closing. They informed customers that so many people are banking on line, their branch is no longer needed. It is a low to middle-income area where many people do not have computers and there are many of us who refuse to bank on line due to hackers getting personal information on millions of us. I stopped banking at Chase a few years ago after two major errors on their part; one was a double $700 withdrawal from savings but only one deposit into checking at the drive through. Luckily I caught it immediately, parked in front and went inside. The second was a “temporary savings account” till I decided where to invest a cashed out CD; the Investor Representative wrote it out but kept his notes. Three weeks later I received my first statement and had lost $915.25 in that three week period. They also made one large and one small error on my checking account statement; couldn’t find their error so used my checkbook balance after they refigured the entire checkbook which balanced to the penny.

  13. Well, I guess following the lending rules didn’t matter much during the Bush administration when banks went hog wild loaning money to anyone who wanted to buy a house. The Republicans de-regulated themselves and the greed of the lending institutions laid the groundwork for the second worst financial disaster in the history of economics.

    Maybe our financiers swallowed the worm of free-market, un-regulated capitalism and decided to make as much money as they could, as fast as they could, off as many suckers as they could find so that the stockholders would be happy and the silk suits could get promoted to even higher levels of greed management. Cynical. You bet. It’s purely an ancient human instinct writ very large. Hoarding food and water in a cave, stealing food and water from other tribes and defending resources without sharing are the behaviors that allowed some tribes to survive and others to perish. That’s us.

  14. How ironic that one can’t get housing, ie., rent an apartment or house, without a credit score. Yet, if one succeeds in qualifying for a rental, those payments are not considered as part of one’s credit score. All liabilities should be included in credit score calculations—namely housing and utilities.

    There have been (tough) times in the past when my husband and I were behind on credit card or installment loan payments. However, we made damn sure our housing and utilities were paid. How is that less responsible?

    I actually can recall purchasing our first home (where we continue to reside some 30 years later) without a credit score. Gasp!

  15. I think we are not a failed state but one that is failing under the present administration, and that usurious interest rates are a drag on an economy that punishes the poor and further enriches the already rich (the finance component of our economy). I therefore agree with the remedial idea behind AOC’s and Bernie’s bill, though I recognize there are some minuses in terms of a drag in demand in the marketplace which in turn is a drag on economic growth.

    However, in looking at the relative effect of such a bill as they have proposed, I come down on the side of statutory reduction in the interest rates that credit card companies can charge, especially since such reductions will partially offset a likely if minor decrease in aggregate demand. Interest and fee money that goes to credit card companies that are owned by big banks frequently go to Swiss banks and multinationals that send jobs and capital to China and elsewhere, not my favorite choices in the allocation of capital derived from our economy’s income, so there are other externalities beyond the immediate effects of the proposed legislation to be considered, including the obvious need to end wage inequality (which would reduce the need to borrow in the first instance).

  16. This isn’t new. Why wasn’t this addressed when the Democrats had the WH&Congress? Why didn’t the Obama administration bother to act? It’s interesting –like most things– folks only become concerned when they’re “personally” affected by such a “burden”.

  17. Banking used to be local and simple. Community members running the banks kept people’s typically meager savings secure and leveraged them through banking laws into home mortgages and small business loans and agricultural loans.

    Capitalism took over and local banks were forced by mergers and acquisitions to become non local and explore every opportunity to create debt.

    Not surprisingly the communities formerly served by banking became instead prey.

    All part of of the wealth redistribution scheme that the Republican Party is so beholden to.

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