the United States that allegedly measure a person’s credit worthiness: Equifax, Experian, and Trans Union and Innovis. These organizations are for-profit businesses that have a most significant effect on the ability of a person to borrow money and the interest rate that a person will be charged. In fact, these organizations have an almost absolute authority in deciding who will and who will not receive financing and at what rate since virtually every financial institution will make their decision to lend money, at what rate and when to raise interest rates all based on a person’s credit score from one of these credit bureaus. Clearly, these organizations are extremely powerful from a business point of view since they enable a financial organization to avoid potentially risky borrowers and also to increase profits by maximizing interest rates, loan fees and late fees.
These credit bureaus receive the vast majority of their revenues from financial institutions. Obviously, the biggest financial institutions are the largest customers for the credit bureaus. The credit bureaus want to make their customers happy. And the big financial institutions want to maximize profits. Financial institutions have been able to significantly increase profits by charging an excessively high rate of interest to a borrower because of the borrower’s credit score and through the tactic of raising the interest rate on an existing loan simply because a person’s credit score has changed.
While the process of evaluating a person’s credit worthiness can be objective and statistical, it is not. The basis used by the credit bureaus for assessing and changing a person’s credit score is mostly subjective heuristics or rules that they have developed to suit their goals. Of course, the primary goal of the credit bureaus is maximization of profits and since their profits come from financial institutions their strategy is to please the financial institutions by providing credit scores that maximize profits for the financial institutions. Credit scores can and should be based strictly on statistics. However, the credit bureaus do not want to rely on statistics to rate a person’s ability to pay since that would reduce the interest rates that their customers, the big financial institutions, can charge. And they want to keep their customers happy.
Credit scores should be statistically based and calculated by organizations that have no profit motive. A credit bureau must be independent and objective, fair and impartial. For-profit credit bureaus are neither independent nor objective nor fair nor impartial since they are in business to make a profit and they make their money from the financial institutions. They are clearly biased in favor of Big Finance. The only way to achieve independent, objective, fair and impartial credit ratings is to have the government take over the task of determining a person’s credit worthiness. For-profit organizations should not be allowed to provide credit ratings. These biased credit bureaus are also partially responsible for the current economic crisis since they have enabled Big Finance to raise interest rates and finance fees to the point where millions of people are severely constrained financially. Severely constrained consumers cannot consume.
Credit scores are meant to indicate a person’s credit-worthiness or ability to pay off a current or a new loan. A person’s ability to make payments on loans is based on both controllable and uncontrollable factors and these factors may be very temporary or extend for a longer period of time. A true credit score will estimate the risk to the finance company regarding the probability that a person will totally default on a loan. Total default means never, ever paying back the loan. If a person is unable to temporarily make payments on a loan because of unemployment, under-employment or illness that does not mean that they are in default. Unfortunately, finance companies are very quick to declare a person in default even though in fact they are not. Credit scores attempt to predict the future and there are many, many variables that need to be considered when estimating a person’s ability to pay. However, the credit bureaus do not take all variables into consideration.
If a person loses their job, it can take anywhere from four to nine months before they are able to gain comparable employment assuming a relatively stable economy. During this time the person is not able to pay all their bills. It should be clear that this period of unemployment and inability to pay bills is only temporary. However, finance companies do not care. They assume that the person’s inability to pay their bills is permanent. This is also the case for the credit bureaus. While it would make most sense to allow the unemployed person a deferment in their financial obligations, finance companies have no mercy whatsoever; they are only concerned about profits. As soon as the person pays late, they assess a late fee. If a person pays late two or three times, the finance company will significantly increase the interest rate. If the person fails to make payments for three or four months, the finance company begins a harassment program where they call the person dozens of times a day from eight o’clock in the morning to nine o’clock at night seven days a week. And since the person is unemployed and not able to pay, there is nothing that they can do. The finance company will only pursue the person for a month or two before they consider them in default. By that time the amount that the person has borrowed has increased significantly into the debt owed to the finance company.
Consider a person who has a credit card with a $1000 limit who has temporarily lost their job. Because of late fees, over-limit fees and excessively high interest rates (32%), the $1000 that they borrowed has doubled into a debt of $2,111.32 within 11 months. And even after the finance company declares the debt in default and totally ruins the person’s credit, they sell the debt to a collection company which ruthlessly and relentlessly pursues the individual even to court in order to collect the debt more than half of which is interest and fees. Even if the person obtains employment in month 11, it is too late. The wheels of Big Finance have moved and crushed the person. This must also be viewed within the context of multiple accounts all of which could double the person’s debt obligations. And now the person who became unemployed through no fault of their own and has struggled financially through eleven months of unemployment is faced with almost insurmountable debt and a dismal credit score.
| Month | Late Fee | Over-Limit Fee | Interest | Total Price for Money | Total Price as Percent |
| 1 | $30.00 | $30.00 | $28.27 | $88.27 | 105.9% |
| 2 | $30.00 | $30.00 | $30.62 | $90.62 | 108.7% |
| 3 | $30.00 | $30.00 | $33.04 | $93.04 | 111.6% |
| 4 | $30.00 | $30.00 | $35.52 | $95.52 | 114.6% |
| 5 | $30.00 | $30.00 | $38.07 | $98.07 | 117.7% |
| 6 | $30.00 | $30.00 | $40.68 | $100.68 | 120.8% |
| 7 | $30.00 | $30.00 | $43.37 | $103.37 | 124.0% |
| 8 | $30.00 | $30.00 | $46.12 | $106.12 | 127.3% |
| 9 | $30.00 | $30.00 | $48.95 | $108.95 | 130.7% |
| 10 | $30.00 | $30.00 | $51.86 | $111.86 | 134.2% |
| 11 | $30.00 | $30.00 | $54.84 | $114.84 | 137.8% |
This unfortunate person is now severely constrained financially even though he or she is now employed. Once they begin to make payments, they still have to pay over-limit fees in addition to the excessively high interest rates and that situation will continue for years. Also, they are now labeled by the credit bureaus as unworthy of any credit, they cannot consolidate their debt and they struggle if they can to pay all their debt most of which is interest and fees. And this scarlet letter of ‘unworthy of credit’ remains with them for the next seven years. Unfortunately, the government does not step in to help these unfortunate individuals, tens of millions of them and their families. But these severely financially constrained families have a significant effect on the economy. They cannot buy the goods and services which they need and want because they do not have any money left over after paying all their debt. This situation applies to the majority of the unemployed, the under-employed, those without health insurance who have experienced a major illness and many of those who have gone through divorce—tens upon tens of millions of individuals and families. And the aggregate effect of their significantly constrained consumption undermines the stability of the economy.
Virtually all credit scores are affected adversely by late payments. However, late payments do not indicate a failure to pay or even the potential for default. In other words, there is no risk associated with late payments. People who pay late obviously have a problem with their cash flow, not with their ability or intention to pay. Credit scores must