Since I work for a financial services insitution and have, in various capacities for several years now, I have spent a lot of time thinking about credit reports. I know the ins and outs of the Fair Credit Reporting Act and the problems that can happen with an individual's credit report.
And, like it or not, we are all defined by our credit reports. This single document can make the difference between owning a house and not, between getting a job or not, between being able to send your kids to college, or not. Credit bureau apologists will tell you that the document is reflective of whether the person has been responsible with their finances over time or not, and if someone has a bad credit report, that is because they were irresponsible. And, often, that really is true. Except.
Except when someone has a singular, long-standing dispute with a company over a bill, and on principal, that person refuses to pay the bill. Except when someone's ex-spouse runs up the credit card bills in that person's name without telling them, declares bankruptcy themselves, and then leaves that person stuck with overdue bills and significant "late payment history" on their credit report. Except when someone is a vicitim of identity theft.
It used to be that credit reporting was fractured and inconsistent, so, financial service institutions had to take into account a number of other factors to show the customer's likelihood for financial responsibility. And, yes, those factors included personal interaction with the customer themselves and personal references from the customer's employers, friends, business associates, etc. But, with the improvements of technology over the years, personal factors do not matter at all compared to the line items on your standardized credit report. So, any of the personal trauma leading to the exceptions listed above do not matter -- typically.
I applaud financial services institutions finding alternative ways of granting credit to folks that do not include the almighty credit report. There are a lot of underserved populations who either have no credit, little credit or abysmal credit out there -- and most members of that population are legitimate U.S. citizens or have every legal right to be in this country. Some of those folks really are irresponsible with credit and should be viewed as very high risk. But, if the financial institution can figure out a way to separate those out, without the benefit of the credit report, why shouldn't they use that methodology?
Innovation like this in financial services is unusual and should be encouraged. Sure, maybe there are some issues with the initial implementation of the methodology, but, the idea itself is solid and important and good.
That's my soapbox speech for today.
Mepkin Abbey, Thursday
9 years ago
4 comments:
I remember my mother telling me that she and my dad went to the local Exxon station to get a credit card when they were first married because they were afraid they were going to have difficulty buying a house since neither of them had established credit anywhere else. They had trouble getting the credit card. Why? Because they had no credit.
I got my first credit card in college, for emergency use only. I remembered my mom's story and decided to jump at the chance to get a card. Needless to say, the dilemma my parents faced was no longer an issue.
Anyway, that had nothing to do with anything.
What are these alternative ways that you speak of?
To tell you the truth, I am not actually sure what the alternative methods are -- I can speculate that it involves a combination of income level, how steady the income is, how long you have been employed by your current employer, and then personal references.
These alternative methods will be used to get a customer into an "entry-level" credit product only, however (i.e., a secured credit card or other type of loan backed by collateral). The idea is that this "entry-level" credit product will in turn help the person to establish a credit history and then be eligible for other/better types of credit.
Banks have been looking to find a solution to the "thin credit file" or "no credit file" problem for a long time. So, the alternative method developed really is a big deal.
Unfortunately, to have no credit is not better than to have a bad credit. On the one hand, I can understand banks who don't confide people without credit history. But why are they made equivalent to those who have a bad credit history? Even if I want to get a credit card, I won't try to get it. I wouldn't like overpay by reason of the fact that I can manage finances, and I didn't use credit cards before.
I agree that bad credit speaks about some irresponsibility and it is up to a credit card company to decide whether to trust a person or not. It is good that there are enough opportunities for bad credit holders to apply for a
credit card.
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