Credit scores in America are a farce. Though much of our financial system relies on them –we as individuals need them to get an apartment, a mortgage, or a job – three private companies with little oversight run them. This is called a cartel.
Equifax, Experian, and TransUnion have shielded themselves in the language of a quasi-governmental agency, entrenched themselves in law through aggressive lobbying, and expanded their power by selling more and more of our data. The consequence for our economy and society is starting to come into focus.
Equifax has made national news for the unprecedented hack that has exposed some 143 million Americans personal data. The damage this leak has done won’t be truly felt for years, but it is surly massive.
Not only did Equifax know about the hack months before it was addressed (and months before it was made public), but senior officials sold stock as a result. Millions of Americans were potentially at risk, but the company protected itself and its officers profited from it.
Once it was made public, the company responded with a toxic blend of incompetence and arrogance. They attempted to force individuals to wave rights to sue in order to see if they were victims. Even when they did, the site offered limited feedback on their information.
It remains to be seen what will happen to those executives or the company, but there is, incredibly, little the government can do at the moment to punish the company for such flagrant neglect. (Update: the CEO announced that he was stepping down just today.)
Nothing is surprising about a major corporation in a powerful industry being shielded from regulatory oversight or even basic public awareness. But if we only address Equifax’s specific mistakes and crimes, we risk missing the opportunity to address the systemic injustice that it and the other credit companies profit from.
Credit scores are racist. I’ve written extensively about how racial exclusion and discrimination was not just a by-product of 80 year of American policy, but a central tennent. This involved banks redlining entire black neighborhoods, financially and legally backed racial covenants in suburban towns, and general housing discrimination (pre and post) Fair Housing Act. Even today Airbnb is belatedly dealing with racism in housing. It has been ubiquitous in housing.
At any given time, defenders of these policies claimed that they weren’t racist. These models were based on formulas or larger inclusive legal policies, etc. etc. Hiding behind wonkiness or unintentional results was as bullshit then as it is now.
It’s not hard to see how this system would inform the credit score process. As overt discrimination became illegal, subtler forms – intentional or otherwise- emerged that were harder to stamp out.
About 90% of lenders rely on Fair Isaac Corporation “FICO” scores (there are several different types). The fact that all of these credit scores are based on supposedly universal metrics (just calling balls and strikes) ignores this longer history of the financial system’s inherent racism. They simply continue it in a different form.
It is well documented that black Americans (and poorer groups in general) were specifically targeted during the lead up to the 2008 crisis. The same major financial institutions and policies that blocked black homeownership for generations unleashed predator after predator through sub-prime mortgages, reverse mortgages, 80/20 interest plans, just to name a few. Black homeownership was disseminated as a result. Little has been done to right this wrong.
On the other hand, many minorities were still blocked from traditional debt markets and turned to payday lenders and other pernicious services. Over 19 million American households rely on them - 1 in 6 families. These types of lenders help individuals rack up incredible debt that blows up their traditional scores.
Many white Americans are simply not subject to those types of services and don’t suffer similar credit score damage. These scores do not account for these larger societal pressures. They harm people without credit cards. They harm people without steady income. They harm people who are poor, basically.
And they continue to harm renters. Although a more recent FICO score has started to incorporate rent payments, most do not (nor do many of these companies have the ability to gather that information from landlords.) This oversight – 35% of Americans are renters – is outrageous.
Somehow, landlords ask for credit scores while not supplying the source of data that is most pertinent to them – does this person pay rent on time? This doesn’t make any sense on the face of it, but landlords have limited options even if they want to be part of a new system.
There are alternatives (and admittedly, homeBody is trying to be a major alternative. Self plug!). Shelterforce published an article last year about local groups forming community funds that take a longer, more nuanced view of a person’s financial history. This is how our financial system used to work. A local banker lived in the same town with the farmer who needed a loan. Rather than automating this process (and then securitizing it) we should bring back a more human element.
Before we can even hope that the federal government or state governments can get around to addressing these systemic issues, let’s hope that Equifax is held accountable for their negligence. A company that holds such power over the future of millions of Americans can’t be allowed to disregard our security and privacy. It will be telling to see what, if anything, happens next. It will take a lot to destroy the credit score system, but maybe we’ll get lucky and it will begin to destroy itself.