S2E4: Credit Scores: Check it, Work On It, and Maybe Break It?
S2E4: Credit Scores: Check it, Work On It, and Maybe Break It?
In part 2 in our series of "Why is it so expensive to be poor?" we take a close look at the system of credit score reporting in America. How did this system come into place? Why is it that we entrust so much of our personal financial data in the hands of for-profit companies? And how does the system systematically disadvantage low-income Americans, especially people of color? To help answer these questions, we're talking to Amy Traub, Associate Director of Policy and Research at Demos.
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Welcome back to Your World, Your Money. And thanks for joining us. I'm Nolan DeFrancesco, program manager for research and reporting at Global Thinking, and I'll be your host today. Last week, we kicked off this two-part series on why is it so expensive to be poor and had a wonderful conversation with Alexandra Cawthorne Gaines from the Center for American Progress. Today, we're going to continue on this question by delving into a particular subtopic, a part of life that affects everyone in America. I'm talking about credit scores. Credit scores are a central part of our financial lives. Yet we rarely take a step back to ponder where the current system came from and how well this system is really working for many Americans. We take it as a fact of life that credit scores exist and follow us around haunting our every financial decision seemingly with an omniscient window into literally every facet of our lives.
But why is that? How did this system come about? And most importantly, where are the major gaps that can work against low-income individuals with especially disproportionate impacts on people of color. To help me answer these questions. I've invited in Amy Traub, a former colleague of mine from Demos - a public policy organization that powers the movement for a just, inclusive, multiracial democracy. Amy is the Associate Director of Policy and Research at Demos. Amy's work on job quality and employment issues includes research on how federal contracting promotes low wages, advocacy in favor of paid sick days and research on the connections between employment issues and consumer debt. She has testified before the US house of representatives and the US Senate on issues relating to job quality and the middle-class. Amy is a leader in the effort to restrict the use of consumer credit history in employment. Her report "Discrediting America" documented the way credit reports and scores are experiencing "mission creep". Increasingly being used by insurance companies, employers, utilities, and hospitals for a variety of economic decisions, even as the credit reporting system falls short on basic goals of fairness and accuracy. Her study "Discredited: How Employment Credit Checks Keep Qualified Workers Out of a job" was the first to quantify the impact of credit checks and job-seekers. She has presented expert testimony, unemployment credit checks to legislators in Colorado, Vermont, New York, Washington DC, and more. Amy! It is so wonderful to have you on. Welcome.
Thank you, Nolan. It's good to chat with you and it is great to join the podcast.
It is a real treat to have you on, and I can't wait to get your perspective on all of this. Did you have a sense when you were starting your research career, that you would end up studying a topic like this? Like what got you interested in poverty issues, and the tangential questions around it when you began your career?
I was always interested in issues impact important working people. I started my career. I left grad school after I left a Ph.D. program in political science to be a strategic researcher for the hotel employees union in New York City. So I've always been concerned with issues that impact poor and working people. But I did not know I'd be working on debt and credit reporting.
How did your research interests lead you here?
Well, the focus on credit reporting came out of work that Demos did in the early two thousand and 2010s on credit card debt. And we found that a whole lot of poor and working people who are carrying credit card debt month after month and paying high-interest rates, these consumers just didn't fit into the stereotype at the time, which was of irresponsible borrowers, who just went on spending sprees. We found instead that they were people whose wages were not keeping up with the cost of living or who didn't have wealth to meet emergency expenses without going into debt. And that public safety nets were just not helping people or not helping them enough. In other words, people were borrowing to make ends meet and they were using their credit cards as a kind of personal plastic safety net. And then people were struggling to pay back all of those debts on time and they saw their credit scores go down. So that future borrowing would become even more expensive. And thinking about that led us to look at credit reporting and how our entire system around lending and credit could be more fair, especially for black and brown consumers and for poor and working people more broadly.
Yeah. Well, before we get into it, I think it's important to take a step back in this series. We're talking about why is it so expensive to be poor? So I'd like to pose that very question to you. Why is it so expensive to be poor? What do you think are the major factors keeping individuals in poverty in America?
That is a huge question, Nolan. But I do think that consumer debt gives us an important window into it. As I said before, pay in this country is just not keeping up with the cost of living. The national low-income housing coalition finds that in 2020, you had to be paid at least 23 dollars and 96 cents per hour, just to afford a modest two-bedroom rental apartment. And that's a national average, obviously, rentals are different in different places, but nationally also the average hourly wage of renters is 18 dollars and 22 cents. And of course, the minimum wage is much, much lower even in places that have a higher minimum wage. It's not 18.22, it's not 23.96. So the cost of living is outstripping pay. And at the same time, we've dramatically cut back and underfunded public goods in this country. So there's not a public healthcare system or public daycare system. There is not paid family leave. And even the systems we do have, things like unemployment insurance are really inadequate and have these tremendous gaps. So people don't have the resources they need to get by. To make up for those societal shortcomings, what are people going to do? They will take on personal debt and that debt can become a trap. I'd say one more thing. I think about how racial equity comes into this because black and Brown people whose families were shut out of wealth-building opportunities that helped to build really the white middle class in this country. Historically public policies have created tremendous racial wealth inequality. And when you have less wealth to draw on, you're even more likely to go into debt to handle an emergency expense. And that's really on top of the discrimination that we know still goes on in the job market, in lending and in higher education, which can also make it harder to meet expenses. And so the system isn't fair to anyone, but it's especially unjust to black and brown people.
So when we look at those cycles of discrimination and those cycles of debt, let's get into it, what role do credit reports and credit scores play in that?
Credit really is a gatekeeper. Having poor credit can mean that you end up paying a higher interest rate on your credit card every month or a higher premium for your car insurance. It can mean your application for a mortgage or for a small business loan is denied. It can mean your utility bills are higher. And the thing that really struck me as unfair, the first time I heard about it, many employers will look at your credit report and this is not a credit score. It's the specific debts that underlie a credit score, a listing of those, and a credit report. And that employer may decide not to hire you because they think you have too much debt or aren't making payments on it in the way that they would prefer to see. So that can become a real catch, you get shut out of a job because of your debt, but how are you going to pay down your debt if you don't have a job?
Yeah. Makes total sense and is infuriating in so many ways. Um, let's take just a step back. I'm curious how our current credit score system came about. I mean, these are for-profit companies that track in such detail, our every financial move, what were the factors that led to the creation of the system as it is today? And I'm curious if it was controversial at the time that there were these for-profit companies that were in charge of monitoring all of this, were there alternatives considered? What was the situation?
Yeah, I think we might take a step back even further and ask why we even need credit reporting in the first place. What purpose is it addressing? The point is that lenders want to understand the amount of risk that they face in making a loan. That way they can charge less interest to consumers that are seen as more likely to make payments on time and higher interest rates to customers who are seen as riskier. And so, as credit has become a more and more important aspect of our daily lives, as we borrow for consumer needs, as well as major expenses like purchasing a home or going to college, credit has really become a gatekeeper for our financial security, but it didn't start out that way. In the early 20th century, the modern-day credit card and mortgage industries didn't exist, essentially. It was retailers, stores that provided the vast majority of credit at the time, and they established local credit bureaus to kind of pool and exchange credit information about their customer who is paying back the loan and who isn't that industry began to consolidate in the 1950s. And then in the 1970s and eighties, we had technological changes that made it easier and cheaper to be storing these massive amounts of consumer data. And then the government got involved in trying to make sure that credit was being offered fairly in the 1970s.
The credit score system began and forgive my ignorance here, did people have credit scores in the seventies in the same way that they did today, or did our modern system of being tracked by companies like TransUnion? Is that a more recent innovation?
Well, the credit scoring system was actually in some ways a reform because previously, especially for bank loans, it was about, does the banker like the look of this person, which we know can very easily be a covert or not so covert way of discriminating racially in terms of gender, in terms of any number of characteristics. So with credit score was supposed to be a more scientific data-based way to be making a determination about who was a good credit risk.
I know the public discussions around privacy have certainly changed over the years, but it just seems that there was a government-backed effort to kind of give the financial data of every person in America over to these for-profit companies and assume that that data would be used in everyone's best interest. Am I crazy for thinking that?
Well, it wasn't government back, the government stepped in to regulate it, to be sure to issue the Fair Credit Reporting Act in the 1970s, for example. So it evolved privately, but the government did not shut it down. Instead, we tried to make sure that credit was being offered fairly. Uh, it was a good piece of legislation at the time, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act. But I would argue that it's time for further legislation.
Makes sense. And that's really helpful context. So in your reports, you talk a lot about the nature of mission creep for these credit reporting systems. Can you tell me a little bit more about that?
Yeah. So credit reports, as we've said, they were developed for lenders to be making decisions about lending risk. That's why they contain a lot of lending information, what you owe, whom you owe it to, what's your history of paying it back. But once you have all this information, there's a temptation to use it for other purposes. And now insurance companies use credit information to determine auto insurance rates. For example, the Trump administration proposed using credit information for immigration purposes, which was really outrageous. And credit reports were aggressively marketed to employers as a hiring tool to determine who would be a conscientious employee. And maybe even if a job applicant would end up stealing from the company. And I can understand why an employer would want to have a way to predict that. Who wouldn't like a crystal ball to be sure that you're not about to hire a thief, but there's no evidence that looking at someone's borrowing and payment experience can tell you if they're an honest person, or if there's someone who would cheat their employer? What it can do is shut a qualified job applicant out of a job, just because they've struggled to pay bills. And we found that that that's what happened. I would note that in many ways, credit reporting is a precursor to these tremendous amounts of data that are now being collected on all of us, not just by TransUnion and Equifax, but even more, data coming from tech companies like Google and Facebook, we have even less control because it's less regulated over how all of that information is gathered and used. And as in credit reporting, we need better rules that will enable people to control our data.
From what you've seen, say in the aftermath of the data breach at Equifax, to what extent is data privacy concerns driving the conversation now, versus just these inherent issues of fairness, accuracy, and disproportionate impacts, or do they go hand in hand?
I think they go hand in hand. The issue to really consider the underlying issue is power. The power that companies have buying, gathering, buying, and selling our information and privacy concerns and fairness concerns, both STEM from those issues of power and control over data.
So let's talk about the sale of private data and the sale of individual consumer data. How does the sale of this data affect individuals every day? And why should people care about it? There's oftentimes this concern about privacy in the abstract that we should care about our privacy. In what ways is our consumer and lending financial data really integral to our own security and our own financial security. And what's the argument for why we really should care deeply about this.
So you mentioned data security. And one issue that I realize we haven't discussed is data breaches. And the fact that just as credit reporting companies don't have an incentive to invest in good dispute resolution procedures. They also don't have an incentive to really be investing in good data security. And that's why we've seen huge, massive data breaches that put all of us at risk. Absent a data risk, a data breach, and a loss of data security, there's financial security, which you also mentioned. And with that, the issue is not so much, oh, we don't have privacy it's that our information can be used against us in making a loan, in employment, in all kinds of ways. With credit reporting, you know, when your information is being used, that's a feature of the Fair Credit Reporting Act says, you need to sign off when your credit report is being used for lending or for employment. You have to authorize it. I argue with employment that's not as meaningful as it should be because an employer can say, sign this form, authorizing me to do a credit check, or I'm not going to consider you for this job. So that is not much of an agreement to release the information, but at least, you know, then that they are looking at your credit report. With these other types of data, the types of data that are gathered by Amazon and Google, and Facebook, that information is being used in all sorts of ways that we never know about to make all sorts of decisions about the type of information that we're going to be shown in a web search, just a whole range of things that do impact our lives in ways that go far beyond just a question of privacy.
In what specific ways are low-income Americans and disproportionately people of color specifically harmed by our credit reporting rules. Is it merely an issue of accuracy concerns or is there something more systemic going on here?
Yeah, I've been asked, how could I possibly be saying that credit scores are racist? Aren't they science? Well, it's true credit never explicitly takes race into account, but they're not race neutral because credit scores, the underlying data that they're drawing on is about personal borrowing and payment history that shaped by generations of discriminatory public policies and corporate practices. Throughout American history, black and brown families have been systematically excluded from wealth-building opportunities that benefited white families, and that exclusion produced really fast wealth inequality that we'd like to think disparities are disappearing over time. The fact is the latest data shows it's only growing deeper and for every dollar in wealth held by the typical white household, the typical black household has just 10 cents. And the typical Latinx household has just 12 cents. When you know that data, it shouldn't be surprising that lot out of wealth, it was passed down across generations, black and brown consumers, now disproportionately show up in the data as worse credit risks. And because consumers with poor credit are more likely to be denied loans or charged higher interest rates if they do get loans. That cycle of disadvantage reinforces itself. It's harder to pay back a more expensive loan. Every time credit scores are used to determine how expensive alone is going to be, that reinforces discrimination. And we need to do better!
Let's talk about the fixes. You have some interesting ideas on how we can reform this system. Could you tell us a little bit about those?
I developed a proposal for a public credit registry, which would gradually replace the current for-profit credit reporting system. The public credit registry is designed to be responsive to consumer needs and equity concerns rather than the corporate bottom line like our system is now. The public registry would develop algorithms that reduce the impact of past discrimination, deliver transparent credit scoring, provide greater data security and offer a publicly accountable way to resolve disputes. I also propose getting rid of the mission creep - the use of credit information for non-lending purposes like employment, housing and insurance would be curtailed under our plan.
What have you seen so far in terms of public discussion around reform? Have you seen any glimmers of hope from the Biden administration and how would you gauge, I guess the seriousness of the administration in tackling issues like this?
Yeah, it was so exciting when the Biden campaign adopted the Demos proposal for a public credit registry. I think it makes so much sense that president Biden's first priorities have been battling the pandemic and providing immediate concrete relief to families that are struggling and communities that are struggling, that is as it should be. But as these initial priorities are enacted, we'll see then if the public credit registry begins to pick up momentum, I am seeing some positive signs.
I'm curious if you've seen any movement of fixes within our current system. Is there any movement for companies or non-profits to work with individuals on a credit blind basis, acknowledging the inherent issues in our current credit system? Is that in any way a widespread phenomenon?
I don't know that credit blind lending is the answer. Beyond making credit reporting more fair, I think the answer is to make it less necessary to borrow it all. If we had free public college in this country, students wouldn't need to take on debt to get an education. If we had universal healthcare, we wouldn't be drowning in medical debt. If jobs paid a living wage and people were able to save for emergencies, consumers wouldn't need to resort to payday loans or to putting their groceries on a credit card.
Makes sense. But beyond the lending, in terms of the mission creep for the way credit scores are used in other facets of daily life, is there an opportunity for employers to say, to take a stand and say, we don't want to be a part of a system that is disproportionately impacting low-income people of color. Like we are going to stop the use of credit scores used for this, or alternatively, is there an opportunity for local or state policy to say - in this city, in this state, we will not allow credit scores to be a factor for say, housing or employment.
That is a great point. And for companies, it is an easy thing to say, you don't need a credit check to be hired here. A lot of companies do not check credit in hiring, and there's really no evidence that it is telling an employer anything valuable. So why weed out qualified applicants from your applicant pool? Why introduce what could be a new source of discrimination? Why spend your money on something that has been marketed as a crystal ball? But in fact, isn't telling you anything valuable. And as you say, a number of states and cities across the country have restricted the use of credit checks for employment. And there are some that are looking now at restricting the use of credit history and credit scores for things like rental, for determining who can rent an apartment and how much to charge.
I'm curious about something you said earlier, which is that these credit scores are being marketed towards companies to gauge the risk. I suppose, of hiring employees. I'm curious to learn more about the incentives there who is marketing. The credit score is, is it the credit score companies themselves trying to sell a product towards companies? What's the process going on here?
You nailed it, Nolan. The credit reporting companies already have this product. They already have credit reports. They've already compiled them. Why not sell this product? They already have to a new market, which is employers. It's no longer, so new, but that was the thinking at the time - once you've got a product sitting there on the shelf and its information, you might as well sell it in every market that you can imagine. And so why not use credit for immigration and credit for employment and credit for everything else when you've already got that product sitting there. And that's why it was marketed so aggressively. Part of the argument is that credit really is part of our public infrastructure in this country. You need credit to do so many different things. Why should it be controlled by private companies that are looking after their profit interests rather than certainly rather than the interest of consumers, but really more than the interest of lenders as well?
We've touched on it briefly, but the issue of accuracy in these credit reports seems to be kind of a central issue. Can you, if possible, go into a little detail about, is that process of inaccuracy something that disadvantages low-income Americans or disproportionately people of color?
Yes. So errors in credit reports are very common and they're more likely to be errors reported by black consumers and immigrant consumers. And one reason why errors are so common is that credit reporting companies do not have a financial incentive to ensure that credit reports are error-free for the lenders that are their customers. If there's an error cropping up occasionally, it doesn't matter that much. They're looking at hundreds or thousands of credit applications. If one of those is yours and yours is the one with the error. That makes a huge difference, but consumers are not the customers. Ordinary consumers are not the customers of the credit reporting companies. And so there is not an incentive to resolve errors or to invest in a system that would make disputes saying, Hey, there's an error on my credit report. Experian, could you fix it? That system is largely automated. There is not a good dispute resolution system that really allows you to say, hey, this furnisher gave you data saying I owe this money, but actually, I've never taken out that loan. You got me mixed up with someone else. That system is terrible. It's terrible because the credit reporting companies don't have an incentive to invest in making it a better system. And the public credit registry would have the consumer interest at its heart and would invest in a strong system that actually allows you to get errors resolved on your credit report.
Makes sense. And I, this is probably a good time for a small PSA to any listeners here is that it is important to check your credit score. And there, there are options to get free access to your current credit reports by the multiple companies that hold them such as TransUnion, Equifax. And it's important to check that. And however imperfect the system may be to report errors, it's probably important to report any errors you see. Do you have any particular words of advice for individuals going through that process? I know that's not exactly your focus, Amy, but I'm sure you might have some good value to impart.
Well, I will say that one of the few things that the credit reporting companies have done to accommodate consumers during the pandemic and the economic crisis we're all facing, is to make credit reports free every week. So typically they're free every year. Now they're free every week. So you can go to annualcreditreport.com. That is the only site. There's a lot of, uh, fake sites out there that pretend to be free. And then they're going to sign you up for something that will bill you every month. You can go to annualcreditreport.com and get a free weekly credit report from each major Bureau online. And I do recommend that folks check credit reports for errors or for fraud.
Continuing on that for just a moment on an individual level. Do you have any advice for how people can adapt within our current system, either from the standpoint of an individual or perhaps even a company, an employer, what can people do to work within the system we have just to make it more fair, more transparent, and more equitable for everyone involved?
Well, we've said that people can check their credit reports, try to get any errors addressed. We've said that companies absolutely do not need to use credit reports in hiring, most don't, it seems. Sometimes it's been 50% that do, sometimes 60%, but there's a lot of companies out there that are not checking credit in hiring. And if you're an employer, don't do it. It's not telling you anything valuable.
So to finish up here, I'd love to pose to you the same question that we posed to Alexandra last week, which is - if folks are hearing this and they feel particularly passionate about the issue of poverty and may feel outraged at the specific injustices committed in our current credit reporting system, how can people engage on that? How can people best engage on the issue and push for change either in their local communities or at a state and federal level?
Yeah, we need fair lending. But as I said, we also need a society that's less based on debt and where people can thrive economically without having to take out a loan or rely on credit. And I think we have an opportunity with the new president and Congress to really be making historic in public goods and in creating good jobs and raising wages as well as fair lending in this country. I think that's the thing to push for in this moment. And there are so many great organizations to join up with and advocate with including local groups all over the country, affiliated with organizations like people's action, the center for community change, and indivisible, as well as groups that don't have a national affiliation. So my suggestion is to find a group organizing locally and join up, and credit injustice is part of all of these larger fights that are being fought right now.
And probably a good opportunity to check out Demos as well. You can learn more at demos.org because Demos, as an organization has partnerships with local organizations around the country, pushing for change like that. And I think it's a good gateway to learn more and get involved.
We do, we do, and we are an information source for people. We do research and advocacy and legal work. We are not a mass organization that folks can join directly, but thank you so much for sharing our web address, demos.org. And we do encourage people to come to our site, sign up for email lists, and follow us on social media.
Amy, it has been such a pleasure to chat with you. Thank you so much for coming on.
Great speaking with you, Nolan. Thank you.
So that's our show. Thank you so much for joining. We cannot wait to have you join us next week. We're going to be talking to Anna N'Jie-Konte, the founder of Dare to Dream Financial Planning. She is one of our returning guests from season one. She's one of our favorite people. And we're going to have a great discussion about how to navigate finances as an immigrant or a first-generation American with immigrant parents. These are tricky subjects and it's a complex nuanced conversation. Cannot wait to have you listen in as we chat with Ana. Take care, talk to you soon.