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A Personal Story: How the Credit System is Still Rigged and Boobytrapped

A Personal Story: How the Credit System is Still Rigged and Boobytrapped

Written by Bryce Covert

My (early) New Yearís resolution was to get a credit card. You see, I have never had a credit card. And thus if I were on the dating market, my OKCupid inquiries would be flatly rejected. Itís not that I have a bad score. I just donít 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 havenít owned any credit products. Iíve paid my rent on time every month and paid every bill before the due date. But those things donít make their way over to FICO. Iíve 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 Ė I just literally donít 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 donít have a score because I donít 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 Ė a bank from which I want a mortgage, say, or even a real estate management company instead of a landlord Ė 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 doesnít 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 wonít 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 isnít 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 donít have a bank account because they donít think they have enough to make the minimum balance. This isnít 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 ďalternativeĒ 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 youíre already pulling in just enough Ė or not enough Ė 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 Iíve 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 donít have a score until a hard inquiry was run on me Ė 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 thatís generated by applying for a credit card looks pretty fishy when you donít get accepted for a card Ė 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 Iím 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 Iíll qualify for a particular card. Even my bank, which Iíve been with for over 10 years, couldnít 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 Iíll 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 wonít ďdiscriminateĒ against me by pushing me toward the credit product Iím more likely to qualify for.

Yet this lack of transparency on the bankís 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 isnít the one a lender would see. And until the Consumer Financial Protection Bureau came along, they were barely regulated Ė although the bureau is already overseeing the largest ones and is currently fielding consumer complaints.

Iím glad that the CFPB now 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 wonít do is sever the ironclad link between taking on debt and participation in the finance industry. Even if these products improve, Iíll still have to convince someone to give me a credit card Ė a product I have never wanted Ė so that I can be sure of housing and employment.

This post was originally published by the Roosevelt Institute.


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11:37AM PDT on Oct 9, 2014

I understand your situation. As for me I prefer not to take credits and not to be in debt, as you said. I try to calculate my budget and save some money. However I am not so lucky with my job, and sometimes I am lack of cash. For thees situations I chose the online service that gives cash advance loan no faxing. It does not require credit history, only the confirmation of your solvency. This is right for me and you, as I can see. I take only short-term loans to live to the next salary. I always avoid long-term liabilities.

10:03PM PST on Jan 31, 2013

I had a similar experience in 1974 when discrimination against women applying for credit cards was perfectly legal. I was newly divorced, and my ex-husband had a great credit rating, thanks to the income I earned and the fact that I paid all bills on time. But I had no credit rating at all. I learned that the easiest way at that time to get a credit card is to get it from a department store. What's the situation now?

4:55AM PST on Jan 31, 2013

There is only one central credit rating organization. One's credit worthiness is based on reliability of paying bills - period. That includes paying phone bills, rent, and energy bills.
So having a credit card is not an issue ...

4:49AM PST on Jan 31, 2013

Shocking! So glad the banking system is different here in the Netherlands. Far simpler, fewer fees, far more transparent.

Credit cards only gained popularity in the 1990's. Before that, every one payed cash or by check. I knew a couple of people who didn't even have bank accounts - didn't trust banks!!!

Now that checks have been abolished (less chance of fraud, less time wasted in stores, can't be stolen in the mail), we pay by direct debit bank card - or cash!

Also credit cards do not have the upper hand - we pay only 12.4 % interest per year or 1% per month. And that's up from 10% per year 3 years ago.
Nothing like the 18, 20, 24% I have read about in the U.S.

8:50AM PST on Jan 30, 2013

The banks always bounce back, but the sad part is they bounced back with a loan from US!!! The money they received when everything went crazy in 2009 was from us, the citizens of the USA!! They need to get rid of those 24% percentage rates and get a wake up call. The wake up call is all of us who don't have a credit card, and those of us who do with the high percentage rates, and all those who don't want a credit card convince those who are presently indebted because of credit cards to tell the banks where to shove their credit cards and stop using them. Oh, but then the banks will be in trouble again and have to "borrow" (more like "take") from us again. A vicious cycle that needs to end and the government should regulate them, or at least until they pay us back. JERKS!

6:38PM PST on Jan 29, 2013

My husband and I are in the midst of refinancing my house. I had to add him because even after never missing/being late on ANY payment for the past 6 years, my credit is still mediocre enough to NOT get a good rate (currently financed through Bank of Amerika-not the original bank;BoA BOUGHT my 8.7%loan) Interestingly, because my husband leased a car less than 10 years ago is the ONLY reason he has ANY credit score; even so, he only has a score at 2 of the 3! The system is broken and the only folks who can do anything are the same idiots who got us into this mess to begin with; the bankers themselves. I take responsibility for my actions, yet they still get no punishment for their selfishness and greed.

10:26AM PST on Jan 29, 2013

It's strange that something that has become the de facto measure of reliability, the credit score, is so completely opaque. And it is apparently a dynamic process, too -- seems like the rules for scoring are evolving, in a fairly creepy way.

I discovered this last year when my home insurance rates went up, with a cryptic note that it was mandatory because I lacked a credit card. I'd cancelled mine -- no small undertaking -- many years ago when that industry began to go nuts & charge huge interest rates for no apparent reason. Plus, I like using the check card that comes with my checking account, and don;t like having debt.

I've had a sterling credit score for decades, though these days the only debt I've got is my mortgage and an unused line of home-equity credit. I'd been thinking by the old rules, where if the amount of available credit you have is a lot bigger than the amount of debt you have, you're good. But these days, it turns out, you have to be really involved with the credit industry for them to consider you "responsible".

So this year, when I opened an account with a credit union, I asked for a credit-card application, explaining why I wanted one. They pulled a credit report for me, and I discovered that my score had been reduced for two reasons: not having a bank credit card, and not having a non-bank (presumably store?) credit card. And apparently it's not enough to have them, you also have to use them regularly. I found it kinda chil

12:25PM PST on Jan 28, 2013

I had the same problem and had to get a co-signer for a loan I didn't need or want in order to build a credit rating so that I could get a credit card that I really didn't want either. Sounds stupid but true and there should be a better, more accurate way to judge someone's ability to pay back credit. Remember the good old days when the bank manager knew the customers by name?

11:38AM PST on Jan 28, 2013


10:39AM PST on Jan 28, 2013

I was in a similar situation a few years ago. Because I'd never bought anything on credit from any source, I couldn't hire a car, I tried to buy a bed on credit and I was refused (just an ordinary bed, not gold plated or anything!) and there were a few other problems too. It seems ridiculous to me that people who are up to their eyeballs in debt can continue to burden themselves but those who have gotten through life without ever depending on credit can't get it when they chose to. Totally warped system!!!

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