Is bad credit a character flaw?

Discussion in 'Economics' started by nutmeg, Jul 15, 2009.

  1. The ads keep coming: Let your credit history slip and so, too, will your lifestyle. Once you're branded with a poor score, it's off to the bad job, the bad apartment, the bad insurance, the bad life.

    It is the scarlet letter of the information age.

    But the credit-rating mega-industry makes some big assumptions when it sells credit as an indicator of character.

    After all, what does poor credit really have to do with a person's ability to be a good worker or a safe driver? And given that credit can be so easily savaged by job loss, illness or divorce -- events we're all susceptible to -- what can it actually say about a person's propensity to steal or to lie?

    The answer, critics say, is nothing. The evidence is slim to none that credit history accurately predicts any behavior outside of borrowing.

    "The credit bureaus have basically said we've got this data and we should use it for more than just loans," says Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit consumer-advocacy group that opposes credit scoring. "They've pitched the product to every possible business, and now they pitch it to the consumers for protection."

    "It's hugely overused," he says.

    In the end, critics say, the practice unfairly punishes people who've hit hard times and broadly discriminates against minorities and the poor, whose scores tend to be lower. Consumers are left with little recourse other than to keep an eye on their credit reports, often by paying the same bureaus that are peddling the data (the reports are available once a year for free.)

    "The only thing people can do is complain to their representatives to change the laws to not allow it," says Wendy Harrison, an Arizona civil-rights lawyer who represents clients adversely affected by credit scoring.

    In the beginning, a good tool for lending
    Few people would argue that the use of credit scores for its original intent -- to assess risk in lending -- is not a good thing. It wasn't too long ago that bank officers decided whom to trust based merely on a file folder and an opinion.

    "The people giving loans wanted to give loans to people who looked like them," says Liz Pulliam Weston, a personal-finance columnist for MSN Money and the author of "Your Credit Score: How to Fix, Protect and Improve the 3-Digit Number That Shapes Your Financial Future." "We have progressed beyond that, thank God."

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    By contrast, the credit score predicts future behavior based on actual past behavior, which is considered a reliable model. It is blind to factors such as race, gender and marital status. As a result, more people can gain access to credit, while lenders are better able to price risk.

    As the credit bureaus consolidated into the big three (despite the title, they are all for-profit companies) and information management dropped in price, the bureaus started tailoring their credit data to outside industries and making sales calls.

    "Now it's becoming increasingly common because a credit report is becoming a cheap form of a background check," says Evan Hendricks, the publisher of the Privacy Times and the author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

    From the perspective of insurers, employers and others, "it's legal, it's not expensive to do it, so heck, the balance tips in favor of using it," Hendricks says. "Everything I see means it's going to become more and more used by more and more entities."

    Expect your credit to be checked
    It's unclear exactly how frequently companies rely on credit information, because they don't disclose the information, citing reasons related to competition. (While credit bureaus and private companies may see, and profit from, consumers' private information, they're not about to let consumers see theirs.)

    In general, though, credit histories are fast becoming standard for people to meet these necessities:

    Employment: In 2006, 42% of employers conducted credit histories as part of background checks for new employees, according to the Society for Human Resource Management. That's up from 35% in 2003 and 19% in 1996.

    Video on MSN Money
    Boost your credit score

    To take advantage of lower interest rates, you need to have great credit. Here are some tips for improving your score.

    Interest continues to grow, for a wide spectrum of jobs, says Susie Henson, a spokeswoman for Experian, one of the big three credit bureaus, along with TransUnion and Equifax.

    The credit bureaus defend their use of credit reports, saying they're a valuable fraud-prevention tool when used in conjunction with other information. Credit reports can verify past jobs and cities of residence. They show whether bills are paid on time and whether an applicant owes money. They can even reflect spending sprees.

    "This can be a way to really have a second check to ensure that that truly is the person that you talked to," Henson says. "It's not just about assessing financial health. . . . It's really to look at how somebody has been rooted in their environment."

    Employers also worry that a high debt load might make an employee likely to steal or accept bribes. Bankruptcy lawyer Carl Starrett frequently hears from members of the military, even at the enlisted level, who need to declare bankruptcy in order to begin improving their credit scores for their security clearance and, hence, their jobs. The same is true in several other licensed occupations.
  2. Housing: Unless you're renting from a friend, expect to produce a credit history. Apartment managers not only check for previous defaults but can look for prior addresses to compare with criminal background checks.

    Auto and homeowners insurance: Almost all insurance companies incorporate credit history data into their underwriting, despite the objections of insurance-agent associations, which say the practice unfairly and illogically raises rates for struggling customers.

    The credit bureaus and insurance companies say there's a correlation, backed by independent studies, between poor credit scores and an increased number of claims. But they admit that they have no idea why the pattern exists and can't prove that one causes the other. They say it's an added risk-management tool that ultimately allows insurers to reduce prices for other drivers.

    "Our belief is that people who are careful and prudent in managing their finances are also careful and prudent in other areas of their lives," says Michael Gaughan, a vice president at TransUnion. "They're prudent and careful in how they manage one of the largest assets in their lives, their home, and in how they lock up and care for their vehicle."

    It's not logical, and it doesn't work
    Not everybody buys this argument, or the others.

    "Credit scoring was bad for people in the beginning, and it is bad for people now," says Ralph Buchanan, director of legal activities for the United Farmers Agents Association, which opposes using credit history to price insurance. "Where is it fair if this husband and wife are making $10 an hour and scraping by to pay the bills and miss a couple bills? Why do they have to pay more for their auto insurance?"

    It amounts to charging people for being poor, agrees Jim Fish, executive director of the National Association of Professional Allstate Agents. "It's a strange and crazy deal that these insurance companies have got going on."

    "The question I have is: How do people ever get out of that cycle? If you're making it so expensive for them, how can they ever rise above that?" he says. "It's no wonder there are so many uninsured drivers out there."

    More from MSN Money
    Your 5-minute guide to credit scores
    How to get a credit report for free
    Estimate your credit score
    Protect your credit in a downturn
    Credit bureau move creates 'secret' scores
    Legislators in many states have introduced bills to prohibit the use of credit history in insurance underwriting. But very few states -- including Hawaii, California and Massachusetts -- currently prohibit the practice.

    Credit scoring may have benefited insurers to the tune of $67 billion from 2003 to 2006, according to a 2007 study by the National Consumer Law Center.

    In 11 states, legislators have restricted the use of credit history for employment. Many would like to see it banned altogether.

    Credit scores are famously riddled with errors, with discrepancies of as much as 100 points among the bureaus. The reports don't reflect on-time payments to utility companies. Credit histories are routinely damaged when bad things happen to good people. And, most importantly, there simply isn't any evidence that people with heavy debt loads make bad employees or greater insurance risks.

    Piper Hoffman, a partner at Outten & Golden, an employment law firm in New York, gets calls every month from workers at all income levels who have lost job offers after a credit check. Some had already been working on a temporary basis and were well-liked.

    One man, an executive, had damaged his credit after taking out a second mortgage to pay his mother-in-law's medical bills. "And he found the job offer being withdrawn because essentially he was being a good son-in-law and taking care of his family," Hoffman says.

    The assumption, she thinks, is that people with debt will embezzle funds, "which is another way of saying 'we don't trust poor people.' And there's no evidence of that."

    Video on MSN Money
    Boost your credit score

    To take advantage of lower interest rates, you need to have great credit. Here are some tips for improving your score.

    In what appears to be the only definitive study on credit history and job performance -- it's difficult to get access to personnel data -- an Eastern Kentucky University professor found no correlation between the two. In fact, the only finding of any statistical significance was the opposite: The workers with poor credit history were more likely to work hard.

    "I would be really worried if companies were making judgments about a person's character based on their credit report," says a study co-author, Jerry Palmer, an associate professor of industrial psychology. "I would not use them."

    What can you do?
    You don't have to consent to a credit check, but a company can legally reject you for employment or housing if you refuse.

    "I don't know that there's a lot we peons can do to fight back, other than make sure your credit is in the best position. You get your credit report every year. You dispute any major items," says Weston, the personal-finance expert. "You want to create your credit file in as good a position as you can. And you want to build your score by using credit."

    If there is a problem, add the permitted 100-word explanation to your credit report, and be upfront with people. Human-resources managers say they are sensitive to the fact that circumstances don't define a person in full.

    If you believe a job denial based on credit qualifies as discrimination, file a complaint with the U.S. Equal Opportunity Employment Opportunity Commission or contact an attorney. Across the country, lawyers are trying to ban the practice.

    It hasn't gotten into court yet, Hoffman says, "but I believe that once we get to that point, we will win."
  3. I notice a thread:

    Fast food places now getting applications from people with bachelors degrees.

    Who do you hire?

    High credit score, no degree.

    Low credit score, but applicant has a degree?

  4. That's easy.

    The one with the big titties.
  5. Credit is extremely important. Don't let this happen to you. Made the mistake when I was younger. Takes a long time and a lot of discipline to recover! Proper money management is a big key to being a successfull trader IMO.
  6. Nutmeg - totally agree with this assessment. Moreover, is such a croc and such a FRAUD. Notice the advertisements: "applies with enrollment in triple advantage".
    What marketing B.S.
    I am amazed no one has challenged the legality of these ads.
  7. Agreed, but this has nothing to do with individual situations and events which can be outside of your control. The credit agencies NEVER make any exceptions and neither do employers.
    Imagine this happening to someone:
    getting divorced, losing your house, losing your job to outsourcing, forced to pay $100k in child support, being diagnosed with severe athlerschlerosis, getting a stent, unable to get health insurance under $20k per year.
  8. Eight


    Trade well or live in a credit score nightmare world... cash rules, I can't think of anything that a person with cash cannot do that a person with credit can...
  9. Oh yeah, bad credit is a character flaw! Let me tell you my personal experience. I rolled into California a few years ago and first thing I did was look for a place to live. My credit wasnt totally shot, but i had a judgement against me some years ago (that was paid). I went to a nice little apartment and asked how much. It was something like 650 for a 1 bdrm. I said I will take it. They ran my credit and said, sorry we cant rent to you. You have bad credit. I said..." long are your leases here." They said 6 months to 1 year. "Ok..I will just pay the entire lease for 1 year right now and for your own peace of mind, double the deposit"

    No can do! You have bad credit!


    So you will rent to a guy living paycheck to paycheck, in debt to his eyeballs with a risk he could miss 2 days of work and not be able to pay rent but he has good credit...but you wont rent to me where you have the entire lease paid for the year, there is no risk to you, but because i have "bad credit" you wont rent to me?

    Sorry, its our "policy"

    Yeah it made no economic sense. I did this ALL over California and you would not believe how many people were like this. Of course i finally did find a place, but I decided to start looking at the higher priced 1 bd apartments hoping that they had much higher vacancy rates and were more lenient with credit. Luckily i found a place that was only 825 per month. Much better than the 2k per month i was spending on low end hotels!

    This was in 2006 that i had this problem. It would've been easier for me to buy a house than to rent an apartment.

    So basically, if you are poor and have bad credit, you are screwed. If you have money and bad credit...well if you look around hard enough and for several weeks, then you MIGHT be ok.

    So it turns out, cash is not is. At least back then it was. I dont know about today as i bought a house now.
  10. buylo


    What do you mean? They have such catchy tunes in their ads, which makes me oblivious to the fine print.
    #10     Jul 15, 2009