I used to be obsessed with conspiracy theories. Some personal favorites of mine are anything about the Denver International Airport, the Bermuda Triangle, or Area 51. If you’ve ever started down the path of reading or discussing a conspiracy theory, you probably know how easy it is to begin believing and finding evidence everywhere to support it. This is why conspiracy theories can go viral, along with the fact that they are spectacular or outrageous to the point of commanding attention.
Another popular conspiracy theory revolves around the idea that some unspecified “government” wants to control the behavior of their citizens. A common theme is some sort of “microchip” being implanted within every person, which is used for all identification, payments, access to physical locations, etc., and can be shut off or adjusted at a moment’s notice. Please bear with me, I promise I’m not a lunatic or Paranoid Rob Lowe.
My take on credit and evaluating creditworthiness in the United States is a little different than traditional conspiracy theories. Nobody is really outraged about the FICO credit score system, and for the most part we all continue to accept the process as a given. This is in spite of the fact that nobody really knows how the number is calculated, who the authority is, and to what extent it can and will be used to determine our financial freedoms on an individual basis.
Let’s talk about our grandparents for a second. Picture your grandfather installing a phone line when he moved the family to a new house half a century ago. Do you think the phone company asked for his social security number? If he went and bought a new refrigerator “on credit,” do you think that process involved an arbitrary 3-digit number?
The modern FICO system only dates back to 1989, and is based on the consumer credit files maintained by the three national credit bureaus: TransUnion, Equifax, and Experian. According to Wikipedia (sourced from the FICO website), credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. It makes sense that financial institutions would be very interested in the creditworthiness of the individuals they do business with. What doesn’t make quite as much sense is the other areas of our lives that are being impacted. Also from Wikipedia (10/23/2011 Chicago Tribune):
“Usage of credit histories in employment screenings has increased from 19% in 1996 to 42% in 2006.”
While a credit screening for employment may not include the numerical score, the fact remains that within a span of 10 years, companies more than doubled the frequency with which they make hiring decisions based on a person’s credit history, rather than simply upon skills, abilities, experience, personality, and other things related only to the job at hand. Perhaps the rationale is that by evaluating a person’s financial responsibility, the company can draw conclusions about their conscientiousness or some other characteristic which vaguely relates to the workplace and job duties. Credit checks are increasingly being used in other industries too, such as insurance and utilities. As much as I dislike this trend, I have a much bigger issue with credit scores in particular.
Again, from Wikipedia:
“Because a consumer’s credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.”
Not cool. Since the information at these 3 credit bureaus is used to determine not only whether somebody can borrow money, but also whether or not they can get a job, it would be nice to know that the “powers that be” were at least on the same page! By this logic, your credit history and score are really more of a function of which bureau it’s pulled from versus what actually took place in your financial history. Seems legit!
Have a look at another sentence from the same article (bolding mine):
“Although the exact formulas for calculating credit scores are secret, FICO has disclosed…”
What follows is a list of components and a general consensus for how much each component factors into the overall calculation. This bit I found interesting:
“Income is not considered by the major credit bureaus when calculating a credit score.”
Am I crazy to think that income should actually be one of the most important factors regarding whether or not somebody can pay back a debt? The amount of money somebody earns on a regular basis seems fairly relevant in determining the risk of them defaulting.
It frustrates me that there is no way of truly knowing how this all important 3-digit number is calculated, even though it will be used to determine whether or not you can be trusted with money, and even though the final number or the factors which go into it may be different depending on the bureau used. But wait, there’s more!
“Americans are entitled to one free credit report in every 12-month period from each of the three credit bureaus, but are not entitled to receive a free credit score.”
This is so ridiculous that it borders on not making sense. Let’s recap this: you can ask the bureaus to show you what information they have on file for you to see whether or not it’s accurate, but only once per year, and if you want to see the actual score associated with your report (which is what any institution really cares about anyway), it’ll cost you extra. Just to add to the comedy, check out this follow-up statement:
“If the consumer disputes an item on a credit report obtained using the free system, under the Fair Credit Reporting Act (FCRA), the credit bureaus have 45 days to investigate, rather than 30 days for reports obtained otherwise.”
Translation: if you fork over some money, we’ll look into what we may have messed up about your creditworthiness. Otherwise, we’ll get to it when we get to it. This process isn’t about accuracy or looking out for the consumer at all.
Let’s recap everything real quick:
- The FICO score system is only as old as a Millennial
- FICO will not reveal how the score is calculated
- The score is based on your credit history, information owned solely between 3 large organizations
- Your report and score may vary depending on which one of the 3 providing the information
- You cannot ask for your credit history or score any time you want – in fact you’ll be penalized if you check too often
- Your credit history and score are increasingly being used for non-traditional purposes such as employment screenings and insurance
Who needs microchips when you have a system of financial monitoring and control as elaborate, widespread and secretive as this? Seriously, our financial lives are now governed by 3 oddly named organizations who own all our information to varying degrees of accuracy. These agencies provide information used in a secret formula that scores you as a consumer with a 3-digit number. This number determines how much spending power you possess, whether or not you can take out a mortgage, finance a car, enroll in insurance, or install your damn cable. It may not be on the same freak-out level as microchips, but make no mistake: this system determines whether you are financially free or in economic prison, and if history is any indication, the system will only continue to expand to other areas of our lives.
Ranting aside, protect your credit rating with your life. Constant vigilance, continual monitoring, and quick corrective action is the name of the game. Nobody is perfect, I have made mistakes in the past which I am still trying to recover from. But if it’s this arbitrary number which controls a disproportionate amount of your financial life, perhaps we need to focus on it to the same extent.
What do you think? Have I gone full “tin foil hat”? Have you had some of the same thoughts or observations about credit?