For a year now I’ve been trying to learn as much as I can about economics. I’ve read lots of magazine articles and a few books and I’ve watched way too much television. Unlike Obama, if the last year were an economics class and I had to give myself a grade, I wouldn’t feel comfortable blaming W. and would therefore have to settle for a high D or a low C. Unlike Time magazine, which coroneted Ben Bernanke its person of the year this week, I still do not have a grasp on what the Federal Reserve actually does, or where it gets the power required to do it. I do not comprehend the particulars of our debt to China, how it happened or what it portends. Some say we’re owned by China, most others say nothing. And even though the company that owns my house has changed four times in seven years, I have no idea how or why mortgages are traded, or sold, or swapped or stolen.
Of all the things I’ve wondered about over the past year, the one aspect of the economy that puzzles me most is the business of credit scores and the bureaus that assign them. As I understand it, a credit score is determined by a credit bureau based on a number of factors gleaned from a person’s transactional DNA. Not surprisingly, things like loan payments are taken into consideration, as are a person’s track record when it comes to paying other bills on time, or not, a person’s income and the amount of debt carried. All those factors lead to a credit score, which is used to determine how much money a person can borrow, and under what terms, when the person decides, for example, to buy a house. Applicants to one of the largest employers in Oregon, by the way, must agree to having a credit report run on them as part of the hiring process, which strikes me as particularly heinous.
I understand, in terms that are loud and clear, that before a bank issues a loan, the bank wants to know if it’s a wise bet or not based on the applicant’s history of managing the money. That’s about where my understanding ends.
First of all, who exactly is in charge of these credit bureaus? Are they appointed or have they just wedged themselves into the control booth? By whom are they authorized to grade everyone? In a way that I think is sinister, the credit bureaus are mentioned frequently on the news, but I’ve yet to see a face, or a shot of an office building. Even the most shadowy of figures have been on the television this year, but the credit bureaus remain abstract. Not that they usually do any good, but is there any kind of oversight committee that monitors their activities? My economics education, obviously, is a work in progress.
My main question for the credit bureaus, though, is this: How is it possibly legal that cancelling a credit card lowers the holder’s credit score? To me, that makes about as much sense as returning a loaf of bread to the grocery because it’s turned out that it was moldy when you bought it, only to find that you’ll now pay considerably more for bread at every supermarket in town. I experienced this trick firsthand when I bought my house in 2002. My credit score was pretty good – I’ve never bounced a check, or gotten into the habit of paying bills late or defaulted on a loan – but lower than I’d expected. That’s because in 1997 I cancelled one of my credit cards because I saw no reason to pay an annual fee on the first when I’d been offered a second that didn’t charge one. I was uninformed enough at that time to think that the fewer credit cards you have, the better. The fact that the exact opposite is true baffled me then, and it baffles me now.
When people show restraint with their credit cards, and they’re punished for that by the almighty credit score posse, who profits by being given the green light to, among other things, charge dramatically higher interest rates and deny perfectly reasonable loan applications from people whose taxes bailed out the very company to which they’re now applying for a loan to remain solvent? Not me, and probably not you either. Call me paranoid, but I find it hard to believe that the scorers and the card companies are not somehow connected. Just the other night, it came on the news that some of the major card companies are raising their rates, which, thanks to the U.S. Congress, they have until February to do. A woman was interviewed who had tried unsuccessfully to negotiate a lower rate with the company she’d had an account with for many years. Her solution, logically, I think, was to cancel the card. The reporter closed with a dire, grim-faced warning about how that would not be good for her credit score, to which Katie Couric said, somewhat nervously, “Yes, well, Merry Christmas.” For the bankers stampeding the trough of public assistance, I imagine it will be merry indeed.
Of all the things I’ve wondered about over the past year, the one aspect of the economy that puzzles me most is the business of credit scores and the bureaus that assign them. As I understand it, a credit score is determined by a credit bureau based on a number of factors gleaned from a person’s transactional DNA. Not surprisingly, things like loan payments are taken into consideration, as are a person’s track record when it comes to paying other bills on time, or not, a person’s income and the amount of debt carried. All those factors lead to a credit score, which is used to determine how much money a person can borrow, and under what terms, when the person decides, for example, to buy a house. Applicants to one of the largest employers in Oregon, by the way, must agree to having a credit report run on them as part of the hiring process, which strikes me as particularly heinous.
I understand, in terms that are loud and clear, that before a bank issues a loan, the bank wants to know if it’s a wise bet or not based on the applicant’s history of managing the money. That’s about where my understanding ends.
First of all, who exactly is in charge of these credit bureaus? Are they appointed or have they just wedged themselves into the control booth? By whom are they authorized to grade everyone? In a way that I think is sinister, the credit bureaus are mentioned frequently on the news, but I’ve yet to see a face, or a shot of an office building. Even the most shadowy of figures have been on the television this year, but the credit bureaus remain abstract. Not that they usually do any good, but is there any kind of oversight committee that monitors their activities? My economics education, obviously, is a work in progress.
My main question for the credit bureaus, though, is this: How is it possibly legal that cancelling a credit card lowers the holder’s credit score? To me, that makes about as much sense as returning a loaf of bread to the grocery because it’s turned out that it was moldy when you bought it, only to find that you’ll now pay considerably more for bread at every supermarket in town. I experienced this trick firsthand when I bought my house in 2002. My credit score was pretty good – I’ve never bounced a check, or gotten into the habit of paying bills late or defaulted on a loan – but lower than I’d expected. That’s because in 1997 I cancelled one of my credit cards because I saw no reason to pay an annual fee on the first when I’d been offered a second that didn’t charge one. I was uninformed enough at that time to think that the fewer credit cards you have, the better. The fact that the exact opposite is true baffled me then, and it baffles me now.
When people show restraint with their credit cards, and they’re punished for that by the almighty credit score posse, who profits by being given the green light to, among other things, charge dramatically higher interest rates and deny perfectly reasonable loan applications from people whose taxes bailed out the very company to which they’re now applying for a loan to remain solvent? Not me, and probably not you either. Call me paranoid, but I find it hard to believe that the scorers and the card companies are not somehow connected. Just the other night, it came on the news that some of the major card companies are raising their rates, which, thanks to the U.S. Congress, they have until February to do. A woman was interviewed who had tried unsuccessfully to negotiate a lower rate with the company she’d had an account with for many years. Her solution, logically, I think, was to cancel the card. The reporter closed with a dire, grim-faced warning about how that would not be good for her credit score, to which Katie Couric said, somewhat nervously, “Yes, well, Merry Christmas.” For the bankers stampeding the trough of public assistance, I imagine it will be merry indeed.
