Credit is King

 

On September 8th, the second largest credit bureau in the world, Equifax, reported to the public that its digital security was compromised and that the personal information of millions – possibly in the range of 140-150 million – was stolen. As the details slowly emerge and we learn more about what, or who, may be to blame, we (the consumers) are left to deal with the consequences of Equifax’ errors.

This is upsetting for a number of reasons. For most, at the top of the ‘upsetting reasons list’, are the additional headaches this mess brings (here’s a solid list of actions to consider). Equally at the top of our ‘upsetting reasons list’ at LURN, is that this serves as reminder of how imbalanced and unjust our financial and credit systems are toward low-income individuals and people of color.

The power and influence credit holds over all of us is disproportionate to the level of control we have over it. As you know, your credit score is a major factor in purchasing a home, purchasing a vehicle, and even basic things like opening service with utility providers. For many of us, this isn’t a major issue because we have integrated fairly well into this system. We have the means and opportunities to slowly build and maintain our credit and to work with the financial institutions that govern this system. Yet, even those of us who integrate well into this system understand how detrimental one or two derogatory marks can be to the overall health of our credit scores. Yet, for us well-integrated individuals, this imbalance isn’t exactly devastating because we have a decent understanding of how to correct potential credit errors. We either make-up a late payment or call the company/creditor that made an error and resolve the issue. I did this a few months ago with an error for a credit card payment that threatened to affect my credit score. Resolving the issue wasn’t technically complicated – but it was incredibly time consuming. I spoke with countless entry-level representatives until I was finally provided with the information of someone in a position of relative power. It then took a few weeks (yes, weeks) of calls/emails and faxes (why we still rely on faxes is beyond me) with this individual before they resolved my issue. Oh, and then I had to wait three months for the money that I should have never had to pay, to be credited back to my account. THREE MONTHS. All together, this process took about four months.

I’m sure you can already imagine how what I describe above would affect some more than others. And, although working within the credit system can be difficult, it’s not exactly the biggest issue. Bigger than that is the fact that many can’t even enter this system. According to a report on credit “invisibility” by the Consumer Financial Protection Bureau, it is estimated that 45 million individuals in the US have no credit scores. This report also finds that “[30%] of consumers in low-income neighborhoods are credit invisible and an additional [15%] have unscored records.” Furthermore, “Blacks and Hispanics are more likely than Whites or Asians to be credit invisible (compared to [9%] of Whites and Asians) and an additional [13%] of Blacks and [12%] of Hispanics have unscored records.”

We deal with the issue of “credit invisibility” almost daily at LURN. One of our biggest initiatives is a micro loan program, the Semi’a Fund. This fund directly supports food entrepreneurs in low-income neighborhoods. Most of the entrepreneurs with whom we work straddle the line between the formal and informal economy; a majority of our borrowers are street vendors (which is still not permitted in the City of LA) and the majority of our borrowers have no credit scores. These characteristics are precisely why they came to LURN for support – because no other lending institutions will support them. And why would they? Our major financial and credit institutions perceive the borrowers with whom we work as “too risky” and not worth the time necessary to develop alternative criteria for assessing credit worthiness. We’ve taken a different approach. We have worked tirelessly to assess potential borrowers on more than just their credit scores and our results are rather astounding (#humblebrag).

 

Here are some quick facts about our fund/borrowers:
100% of our borrowers maintain perfect repayment records (i.e., not a single missed payment).
On average, our borrowers pay 34% more than their minimum monthly payment.
69% of borrowers pay more than their minimum monthly payment every month.

 

As great as this information may be, it’s not all sunshine and rainbows. You see, we’re “too small” to report these awesome stats to bureaus such as Equifax. We have 13 active accounts – Equifax requires 500 -__- Thus, we can’t really help improve the credit scores of borrowers, even though they’re kicking major butt.

And really, why would institutions like Equifax change? Business as usual is working just fine for their bottom lines. Equifax pulled in $3.1 billion in revenue last year and their CEO, who just stepped down, gets to walk away with an $18 million pension. They can continue to perpetuate the lending and credit conditions that keep people out of their systems, treat our private information like a joke, and avoid any serious repercussions. In fact, not only have they figured out how to act with impunity, they have figured out how to profit from their mistakes: in August, Equifax acquired (i.e., bought) ID Watchdog a “leading identity protection and resolution services company”.

Clearly, a lot needs to change. We need to encourage lawmakers to do more than impose additional security measures for institutions such as Equifax (that’s a start, but it’s not enough). To address the issues of security and inclusivity, I believe we need to give serious thought to decentralization. Why can’t we develop a system that doesn’t rely on three private bureaus to securely maintain our confidential information and act as financial gatekeepers? Maybe there’s a way to use emerging technologies to create an entirely different system for reporting and maintaining credit-worthy transactions (a system that is more accessible to a wide range of users and is much less susceptible to hacking)? Yes, this would take A LOT of work, but nothing good comes easy, right?