For all the important numbers in the life of the average American, the credit score seems to wield the most power. It’s hard to imagine how three little digits could determine how an individual will live his or her life, regardless of the circumstances that created it and with the average person having virtually no understanding of what it is or how it’s calculated.
Credit scores determine how much a consumer will have to pay for credit (as interest rates), insurance, and other necessities. For many years, the credit score was a value hidden from the consumer because Fair Isaac and Company, the firm which created the process, decided it would just be too confusing to the general public. (Of course, that’s the usual excuse offered up by big business and government agencies trying to dupe the general public.)
That’s little comfort, however, to those who have been held hostage by the credit reporting companies for decades. Almost since inception, credit data has been full of inaccuracies and misinformation, a problem to which consumers have had little (practical) recourse other than the slow, usually pointless, process required to amend a report.
As of 2012, the Consumer Financial Protection Bureau was charged with the oversight of personal credit rating companies. With countless rule changes over the years, the Fair Credit Reporting Act finally forced at least some restrictions on the credit rating companies. The FCRA is the legislation that required companies like TransUnion, Experian and Equifax to provide free credit report, limit outside access to personal credit files, initiate identity theft protections and other consumer defense measures. A downloadable version of the Fair Credit Reporting Act is available online at www.deerinheadlines.com.
Regardless of the current legislation, however, credit monitoring and reporting services still have entirely too much power and control over the general lives of consumers. A credit report (and score) whether accurate or not, can limit access to vital, day-to-day needs like transportation and employment.
Considering how much inaccuracy can exist or the irrelevancy of the information to the situation, it’s bewildering how it is legal for employers to reject applicants based on a credit score. In another example, how is it permitted that credit score can determine whether someone should be provided with car insurance, particularly when coverage is mandated by the government?
Whatever more ignorant people choose to believe a low credit score doesn’t always mean a person is unwilling to pay their bills or is inept at handling money. Sometimes circumstances change, as with the predatory lending practices that contributed to the housing market crash of 2008.
Likewise, although there is a higher risk in lending to people with a sorted credit history, almost no one takes into account how the score got so tarnished. On the heels of the worst recession in U.S. history, the credit rating process seems almost backwards to the average consumer.
If you can afford a higher rate and larger payment, you get a lower one, and vice versa. A person may be in desperate need of a car or renters insurance but, because of a lower credit score, they are charged significantly higher rates and payments. Wouldn’t it make more sense to offer those people lower rates and payments, making it more likely they can pay on time and help shore up the economy in the process?
The consumer should always keep in mind that the credit reporting organizations are private sector businesses, not government agencies. They are not affiliated with the Federal Trade Commission in any way nor any other government office. Credit scores are big business for those companies that calculate and report them.
In the first quarter of 2014, TransUnion, one of the three largest firms, reported earnings just over $303 million. That’s just for one credit reporting company over three months! So, with billions of dollars in revenue at stake, there is little to no motivation for limiting the power of these companies.
It’s a sure bet that lobbyists for the credit reporting companies are well-entrenched in Washington, greasing all of the appropriate palms to make sure that the “have nots” never catch up to the 1-percent.
Gery L. Deer is an independent columnist and business contributor to WDTN-TV2’s Living Dayton program. More at www.gerydeer.com.