Are You Held Hostage By Bad Credit? The Hidden Truth Behind the Shady Credit Agencies That Can Ruin Your Life
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Remember the old idiom, “Don’t become a statistic”? Well, you already are.
The Minneapolis-based Fair Isaac Corporation, popularly known as FICO, keeps close tabs on your credit files and uses a secret formula to reduce that information to a number that can powerfully impact your life. If you pay a bill late, they know about it. When you use your credit card, they see it. They even know if you are making inquiries to learn about your credit score.
There’s also a lot they don’t know. Some things, like your race or marital status, are prohibited by law from being considered in credit scoring. Other things, like your employment history, where you live, or how much you’ve saved, don’t fit into the algorithms FICO uses. Any normal person might suspect they are relevant to assessing the quality of your credit, but they won’t make a difference in your score.
We are all living, breathing human beings, but big businesses and banks have turned us into half-baked statistics in order to grease the wheels of capitalism – wheels that often catch us in their spokes. At best these statistics are inexact; in many cases, they are much worse than that, with disastrous consequences for the humans they purport to describe.
How did this happen and what can we do about it?
A Bit of History
Credit reporting in the U.S. kicked off in the 19th century when retail merchants and other interested parties created loosely organized local exchanges of information. In a big, young and mobile country, lenders understandably wanted to know something about the people doing the borrowing. Given the cultural norms and the lack of reliable data around, creditworthiness was closely connected to popular notions of “character,” like honesty and thriftiness. This emphasis led local retailers to collect intimate details about peoples’ health, drinking habits and sexual behavior from newspapers and gossip. Being Jewish could also earn you a bad credit rating, or being Chinese, or Catholic, or unmarried, all of which were associated with questionable “character.”
As communication technology developed in the 20th century, the loose-knit organizations evolved into credit bureaus that went national – they were actually among the first businesses in the U.S. to do so. They got quite savvy and efficient about zipping information about consumers from coast to coast. FICO was founded in 1956. Two years later it began selling its credit scoring system. It was the first company to develop algorithms for generating credit scores and got paid royalties for their use.
As these systems grew and became more deeply embedded in the nation’s financial system, they increasingly impacted the the lives and opportunities of citizens. The work of advocacy groups defending consumer rights led to new laws that tried to address fairness and accuracy in credit scoring. In 1971, the Fair Credit Reporting Act (FCRA) gave consumers, among other things, the right to view and dispute reports. The laws continue to be tweaked in an effort to keep up with a rapidly expanding and increasingly influential business. In 2003, an amendment was passed giving consumers the right to view one free credit report a year.
The Federal Reserve inherited consumer rule writing in the 1960s, and for a long time, officials at the Fed took their role seriously. Paul Volcker, Fed chairman from 1979 to 1987, was widely regarded as reasonably tough on consumer affairs and maintained a decent apparatus to regulate industry players and investigate abuses.
Then along came Alan Greenspan. Greenspan’s fanciful free-market economic theories and world view rendered him completely uninterested in consumer affairs matters. Consumer affairs work at the Fed declined sharply in quality and strength. In the past, the Fed had promoted fairness and accuracy in credit scoring as a shield for banks that might face discrimination charges. But in the 1980s and 1990s, bankers turned the shield into a sword. They began holding the scores over consumers' heads.