How Credit Bureaus have contributed to the Degradation of a Nation

To many the words according to Ken Clark, a debt/credit expert and certified financial planner, are all but true.  He is quoted as saying that quite simply, your credit score summarizes your credit risk based on a snapshot of your credit standing at a particular point in time. It’s an overall assessment of your financial responsibility (Rate Nerd).  Then there are those who take on the view of the Manhattan Financial Group who states “typically, a person with a bad credit score is in this position because they lack structure in their life. There are, of course, cases where unplanned health or employment complications are to blame, but for the most part, these are individuals who lack the discipline to pay their bills on time or curb their spending.”  So who’s right or are they both correct?

Origin

To begin to understand the importance of this article we must first review. “Equifax is the oldest of the three bureaus, having been founded in 1899 as Retail Credit Company. It is believed that Retail Credit Company changed its name to Equifax to improve its image.”  “In 1968, TransUnion was created as the parent holding company of Union Tank Car Company. One year later, they acquired the Credit Bureau of Cook County (CBCC), who collected consumer information on about 3.6 million people stored in 400 seven-drawer file cabinets, and a credit reporting agency was born.”  “Experian began as CCN Systems in 1980.  It’s only the first one founded outside of the United States, as its birthplace was in Nottingham, England. It acquired a US presence by purchasing TRW Information Services in 1996.” (Jim Wang). 

How the Damage is done

Reminding ourselves that the primary judge of any one’s credit worthiness is not any individual but a mathematical system created to boil one down to a number.  It is reported that the five major ingredients to achieving this number are payment history, balance carried, credit history, the proper mixture of accounts and finally inquiries.  For payment history the question is asked “Are you paying your bills as agreed?” We are informed that when it comes to payment history “the most recent six months has the greatest impact on your score. The highest weight is placed on the highest payment, bankruptcies, judgments, liens, late payments and collections/charge-offs will negatively impact your score.”  Balance carried is defined as “the actual dollar amounts you owe on various accounts in relation to how much credit you have available.”  For credit history it is defined as “how long have you been credit worthy and whether you have a long history of making payments as agreed.” Then comes the proper mix of accounts which is said to be “Ideally for the credit bureaus, a mortgage, an auto loan, and three to five credit cards.”  Finally inquiries which is stated to be “Each check of your credit report except multiple inquiries for the same thing within 45 days will only count as one inquiry.   Only the first 10 inquiries count each year and inquiries for a job, insurance or utilities, an account review, a promotion (pre-approval offers in the mail), or your own personal review won’t affect your credit score.” (Rate Nerd).

Options

In order for the 44 million people with less than 600 credit score to snatch that golden ring, this magic number must remain close to if not exactly the same as it has before.  Individuals must be able to visualize progress toward their goals in order to achieve them.  This is not the case today but it doesn’t have to be.  There is another much larger section of people in the same boat as those mentioned above.  They are known as “people who do not have a traditional credit scores and there are 50 million of them.”  For them there is an option of using “alternative credit”.  “An alternative credit score is a risk model that factors in payment data not normally used by the major credit bureaus. This can include any type of creditable account, such as utilities and rent. Unlike with normal credit accounts and loan.” 

“By using alternative means to prove creditworthiness, banks can open up the credit market to a large, potentially lucrative sector of the market, such as minorities, young adults and women, according to USA Today but Lenders do not have to accept an alternative credit score and many take the wait and see approach until the credit industry has a firmer grasp on the legitimacy of alternative scores. Fannie Mae and Freddie Mac do not accept these scores as of 2009 but confusingly the Federal Housing Administration will consider canceled checks for services and written statements from creditors detailing your account history.”(Russell Huebsch), this was called in 2000 as a Residential Mortgage Credit Report or RMCR.

Conclusion

So both Ken Clark and the Manhattan Financial Group are correct to a point.  While Mr. Clark see the credit bureaus as an extension of good business and ask us to see it as only “an overall assessment of your financial responsibility”  he missed the point of this being nothing more than a “catch 22”.  In order to have a credit history, you have got to have a creditor willing to help you make that history.  The Manhattan Financial Group sees a person with a low credit score as one who “lacks structure in their life or the discipline to pay their bills on time or curb their spending”.  This unfortunately is probably how all who deem a credit score as the expert on individuals may see it.  This is not only unfair it is also unjust and even though the Manhattan Financial Group does admit that sometimes bad things happen to good people, their overall and far reaching premise is the same.  To me credit reporting agencies have become nothing more than a valid excuse for businesses to discriminate.  If you are not someone or part of a group that they wish not to loan to then all they have to do is increase their policy on the credit needed to acquire their services and nothing more is said.  To say that they are justified is an oxymoron when you compare it to the possible 44 million customers under 600 credit score as well as the 50 million with no credit score at all.  What business would care to ignore the huge market available unless it was for more personal or philosophical reasons?  This nations’ backbone, the public, is no longer viewed as a strong indicator of business longevity and strength and the old saying of a business is only as valuable as its customers, have now been revised to read that a customer must now be good enough for the business.

Information for this article obtained from;

Jim Wang, History of Credit Bureaus: Equifax, Experian, Transunion & Innovis

Rate Nerd, May, 4 2009, Credit Score Secret Sauce-How Credit Bureaus Calculate Your Credit Score

Russell Huebsch, February 26, 2011, Information on Alternative Credit

Manhattan Financial Group, Inc, Credit Scoring