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By Bryce Covert, originally posted on Next New Deal.

One person's story shows how the credit system is still rigged and boobytrapped.

My (early) New Year’s resolution was to get a credit card. You may remember that I have never had a credit card. And thus if I were on the dating market, my OKCupid inquiries would be flatly rejected. It’s not that I have a bad score. I just don’t have one. I had a good score when I was dutifully paying off my student loan after I graduated, but then through paying dirt-cheap rent in Harlem and never paying for cable I was able to pay off the loan. Since then I haven’t owned any credit products. I’ve paid my rent on time every month and paid every bill before the due date. But those things don’t make their way over to FICO. I’ve thus landed myself in quite the Catch-22 that speaks volumes about the lending industry and our reliance on it.

When I moved into a new apartment three years ago, I still had a score, so when the broker ran a credit check on me, she handed me the keys without a complaint. In the intervening years, however, the student loan must have fallen off my history, leaving a gaping void in its place. This is so unusual that when I was applying for a new apartment this summer, the broker told me there must be something wrong with my account. It turned out nothing was wrong – I just literally don’t have a score.

Because I was dealing with humans in both the broker and the landlord, I was able to explain to them that I don’t have a score because I don’t like being in debt. At all. On top of that, I can show steady income because I have the good fortune of being employed at a well-paying job. They agreed that made sense and gave me the keys. But the ordeal made me realize that if I were to deal with an institution instead of a human – a bank from which I want a mortgage, say, or even a real estate management company instead of a landlord – I would probably be screwed. So I decided to suck it up, sell out, and finally get my first credit card.

It turns out I was screwed earlier than I thought. Back when I had a fantastic credit score, I would get credit card offers in the mail by the dozens. So I decided to do the responsible thing and do some research on a good rewards card (might as well get something out of my sell-outery) that doesn’t have an annual fee and has a decent APR. Having found one, I filled out the online application and waited to hear that my soul had been sold. Not so fast: I was rejected on the spot. It turns out that not having a credit score is just as bad as having a damaged one in the short-term. The bank has no reason to trust that I can handle credit, so it won’t give me any. Which means I will continue to be denied credit and continue to have zero credit history.

There was a big part of me that wanted to continue my protest of the financial system that demands you borrow money and go into debt (even if only a month at a time) to participate. But this problem will only get worse. What if the next time I move the landlord isn’t understanding? Worse, what if the next job I apply to runs a credit check on me and decides having no history is too suspicious? (Six out of ten employers vet employees via a credit report.) Despite the fact that I have steady income and pay all my bills on time, I could still be left homeless and unemployed because of my refusal to get a credit card.

The point of this story is not my particular case. I am incredibly privileged to have a job, a steady paycheck I can comfortably live off of, and a landlord who was willing to let me move in and pay her ridiculous New York rent. One point is that if things are this difficult for middle class me, they are 10 times worse for low-income people. Nearly 10 million households in the U.S., or one in 12, are unbanked, meaning they have no relationship with a formal banking institution. Half of them don’t have a bank account because they don’t think they have enough to make the minimum balance. This isn’t surprising, given that over 70 percent of this population makes less than $30,000.

I have the benefit of a bank account with enough money to keep the required minimum balance. Given that, I will likely be able to coerce a credit card out of my banking institution (even if I have to pay an annual fee to do so and put down a security deposit). The unbanked community, however, must usually turn to “alternative” products such as pre-paid debit cards, payday lenders, and check cashers. These are all relatively predatory products that come loaded with fees and high interest. Interest rates on payday loans, for example, can reach 450 percent when annualized. When you’re already pulling in just enough – or not enough – to get by, losing even more money simply to access your own income is a huge problem. Beyond that, if someone who is unbanked tries to return to the traditional banking industry, he or she will probably encounter far more obstacles than I’ve run into. It could become impossible, shutting these people out of the entire traditional lending industry and all that comes with it.

The other point is the infuriating opacity of the whole credit industry. I had no idea that I don’t have a score until a hard inquiry was run on me – something that in and of itself can harm your score or at the very least ward off potential lenders. Perhaps more frustrating, the hard inquiry that’s generated by applying for a credit card looks pretty fishy when you don’t get accepted for a card – because then I have to apply for another, which is another inquiry, and if I get rejected I have to do another, and on, making it look (rightfully, I suppose) like I’m going door to door and being turned away by everyone. That makes a lending institution wary of taking me on. But I have no way to know ahead of time whether I’ll qualify for a particular card. Even my bank, which I’ve been with for over 10 years, couldn’t tell me whether my loyalty or good explanation for my blank credit history would help me out. I was flatly told that the only way to know if I’ll be accepted for a particular card is to apply and find out. Bank employees are barred, I was told, from telling me the criteria used so that they won’t “discriminate” against me by pushing me toward the credit product I’m more likely to qualify for.

Yet this lack of transparency on the bank’s part is nothing compared to the credit reporting companies themselves. The methodologies these private companies use to calculate scores are a closely guarded secret. Even though an estimated 20 percent of scores contain errors, attempts to resolve them often end in frustration and inaction. The score you buy from the agencies often isn’t the one a lender would see. And until the Consumer Financial Protection Bureau came along, they were barely regulated – although the bureau is already overseeing the largest ones and is currently fielding consumer complaints.

I’m glad that the CFPBnow exists and should bring more regulation and transparency to the whole ordeal by cracking down on non-bank lenders, overseeing credit reporting agencies, and demanding better practices from credit card lenders. But one thing it won’t do is sever the ironclad link between taking on debt and participation in the finance industry. Even if these products improve, I’ll still have to convince someone to give me a credit card – a product I have never wanted – so that I can be sure of housing and employment. 

Bryce Covert is Editor of Next New Deal.


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Comment Preferences

  •  USA = a big fat set up for failure for its (2+ / 0-)
    Recommended by:
    sfbob, Sark Svemes

    Citizenry.

    Tipped & rec'ed

  •  Yep, the system sucks (5+ / 0-)

    The no credit score at all issue hit me when I first moved to the US. I applied for a card and was turned down.

    I ended up writing a letter pointing out I had a still working Barclaycard from the UK, and, at that time, bank accounts in the UK, Germany and the USA, plus a steady job as a researcher at a University. Then they gave me a card.

    The most ridiculous was trying to get a bank account. BOA wouldn't give me an account until I had a Florida ID. Florida wouldn't give me an ID until I had a permanent address. I could get an apartment without a bank account. Wash, rinse, repeat. Luckily the University Credit Union would accept a temporary address of my University Department, so I was able to get around it, and I've never left the UCU...

    •  I had a very similar experience. (0+ / 0-)

      Fortunately, I was able to find a local bank that was willing to take me on; despite, incredibly, the fact that I had only barely begun the US leg of my immigration process.

      (Unfortunately, said bank has now been swallowed up by a larger entity with significantly more fees and significantly less service.)

  •  People without credit are viewed with suspicion (3+ / 0-)

    I have not had a personal credit card in decades, though I have one issued by my employer (it would only show on my personal credit score were I to abuse it or to not pay bills I incurred that I'd already been given the money to pay).

    I bought a new car in 2001. The car salesman sat there scratching his head. He really did NOT know what to make of my credit report. I'd paid off my last credit card something like 8 years earlier, about the same time I'd paid off my previous car loan. They finally managed to get me something; actually had a fight with my credit union which offered me a slightly better rate.

    That car loan in turn got paid off; meanwhile I bought a home. Once again there were issues since the only thing on the credit report was the then-open car loan. I ended up needing to clear out an old IRA (was making too much to bother putting money into it) and borrow from my 401k to make a downpayment I wasn't originally being asked for, just for that reason, even though my salary and work history showed I was a good risk.

    I've even had strange things happen when it comes to debit cards, one of them happened just last week. And I learned something interesting.

    Here's what happened. Last Wednesday my partner lost his cell phone (it just and I mean JUST turned up a few minutes ago); we were about due to upgrade so we headed downtown to get new phones. I whipped out the card tied to the bank account I use mainly for mortgage payments and the like. It was declined. Finally was able to pay using a card, which I never, EVER use, that's linked to my home equity loan and reimbursed THAT from my bank account.

    I mentioned this to a friend over the weekend; one of those folks who seems to know how pretty much everything works. His input was that the fraud-prevention algorithm on the card tied to my bank account was tighter than the one tied to my HELOC. Why? The equity loan generates interest; the bank account card doesn't. It's in the bank's interest to make fraud using the HELOC card easier to perpetrate. I'd actually gotten an apology from a branch manager of the bank (which I appreciated); my friend pointed out that of course the head office wouldn't tell people like the branch manager what the bank's REAL policy is because a branch manager, who has to interact with customers in person, would probably feel compelled to be honest about it.

    Did you know that if a bank places a hold on funds that are actually available it is committing a crime? (Anything over $500 is a felony) Did you know that the Federal Reserve actually has a customer service department that anyone can call? I didn't, until my friend began regaling me with stories of how he got banksters in deep shit for hanging on to funds after checks had been cleared.

    Our entire culture really is set up to treat people who don't have credit as pariahs, and to screw over those who DO have credit. It's also set up to take advantage of anyone who isn't fully informed. All of these are sad and all need to be fixed.

  •  Seems to me a CREDIT score should be used (0+ / 0-)

    only when you need credit. Landlords and employers do not give you credit. They put trust in you, so perhaps a different trust score could be invented?

    Wow, maybe this could become the next Facebook ;-)

  •  I'm no authority of the subject, (0+ / 0-)

    but two options you could consider:

    1)  Have a friend cosign for a card until you build up a credit record.
    2)  Your bank may issue credit cards.  Also, at one point I also had a bank account where the "overdraft protection / line of credit" appeared on my credit reports.  It was a low limit, but I never used it.  May be easier to go through a bank you have a log relationship with, I'm not sure.

  •  Another possible suggestion... (0+ / 0-)

    I honestly don't know if this will make a difference since my own experience is about three decades out of date, but when I was first out of college, I had similar problems -- no credit history, no real record.

    I applied for two cards, got turned down. Then I called American Express, and the thing about them is their ordinary card is pay-as-you-go. No balance carried, no precise pre-set spending limit, but early on I knew it was probably less than $1000. Over the next two years, I used the card judiciously, with the single most expensive item charged being a low-end VCR. (I told you it was a long time ago.)

    Anyway, after a year or two of this, I suddenly had a credit history, and was able to get a regular VISA card.

    "Don't ride in anything with a Capissen 38 engine. They fall right out of the sky." -- Kaywinnit Lee Frye

    by Technowitch on Wed Jan 02, 2013 at 03:45:28 PM PST

  •  Yep, it's a guaranteed customer racket.... (0+ / 0-)

    This is what I understand about how it is rigged to incentivize people having to pay interest to credit card companies.  If I am wrong in my assumptions, please let me know:

    The way one gets the best credit is by buying things on credit.  Apparently, even if you have credit cards and have used them in the past if you go for too long without buying things on credit and letting balances build up a bit before paying them off, your score will dip.

    I just paid off some credit cards which built up a balance during a divorce.  Now, I believe, my perfect credit -- and high -- credit score will begin to dip because I am not using the credit cards.  I think even if I use the cards but pay off the balance before the end of the billing cycle my score will dip.

    Thus, if you want to use the credit system to buy a house, for instance, you have to buy other smaller things on credit to establish that you are worthy.

    Guaranteed customers..... What a racket.

  •  Excellent Diary. So much for "Cash is King" (0+ / 0-)

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