Wednesday, May 27, 2015

Nothing in the Modern World Benefits the Average Person

I kept going back and forth about how to title this. I also thought of  "Modern Life is Too Complicated."

This might just end up being a brain dump because I have too many disparate thoughts running through my head. My thoughts are U.S.-based since that is where I live.

One example that stays on my mind is the concept of the credit score (also known as FICO score). Having a negative credit score can greatly affect a person's life. This is because credit scores are used in ways that go far beyond applying for credit. Credit scores can be used as a qualifying factor when a person applies for a job. They are often used by landlords to decide whether or not to take on a renter. They are used by utilities of all kinds (phone, water, electricity, etc.) to determine the amount a person should have to put down as a deposit. Notice that I have not mentioned credit of any kind so far; no loans or credit cards, just the basic necessities of modern life. The same applies to someone with no or low credit. AKA a person who either has not ever used credit, has very little credit (for example, only one credit card) or used to have credit but has stayed out of debt for a long time. Say 7+ years. People with no or little credit are seen almost as bad as people with bad credit. So you can't opt out without it negatively affecting you. Also, paying (non-credit) bills late negatively affects your credit score but paying those same bills on time does not have a positive effect. 

Now you may assume that you would be able to freely access something that can have such huge effects on your life. But no. In the U.S., each individual is only entitled to one free credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) each year. And this only includes your credit information, not the almighty credit score which is what most utilities/loan agencies use as the deciding factor. You have to pay extra to get access to your actual credit score. 

Also, no one knows exactly how the score is calculated. The algorithm(s) used are closely guarded secrets. You can get a rough idea of the calculation here.

So I put on my thinking cap and started to ponder why such a complex system would be put in place. I mean I can understand why past credit performances could be used to predict future creditworthiness but why does this credit score have to seep into every part of a person's financial life?

I came to the conclusion that the system is set up to extract the most money out of the greatest amount of people possible. Institutions make money at every step of the process.  Here are a few examples:

1. The credit bureaus make money by supplying the information on your "creditworthiness" to all the groups that ask for it: potential jobs, landlords, banks, utilities, etc.

2. Several companies make money by supplying you information about your credit report/score for a monthly payment. The information that these companies provide vary in their reliability.

3. The utilities/landlords use the credit score to justify keeping a deposit of your money until you stop doing business with them.

4. The various lenders who use a person's bad credit score to charge them exorbitant interest fees instead of just denying them credit (which would make more sense if they really didn't see that individual as "credit-worthy").

5. The credit card companies who make money on both sides of almost every financial transaction. They get a percentage of the sale from the vendor and get interest from the cardholder.

Now is there a way to use credit without being burned? Of course, and you will find lots of stories online of people who have done it. Those who never carry a balance on their credit card, are always on time with their mortgage, etc. Those who reap all the benefits without being burned. But then there are many other people, about half, who don't pay their balances in full every month. Which leads to lots and lots of money being made by the credit card companies in interest.

This doesn't even include all of the mental resources a person has to use to keep up with all of this information. Or the frustration of having to correct something that is wrong on your credit report.

Anyway, I'm starting to ramble now and should probably wrap this up. I am thinking about making this a series.

What are some issues that you have with how the world treats the average person? Keep in mind that most of the stuff I mentioned above is stuff "privileged" people have to deal with.

1 comment:

  1. Have you seen Maxed Out? It's a great documentary about the American credit system, and talks a lot about FICO scores.