Puffy shirt
Identity theft is, at best, an enormous hassle for the victim. At worst it can be devastating. Victims' "credit rating" can be destroyed, forcing them to pay the PPR (poor person's rate) for everything from credit cards to insurance.
For the life of me, though, I can't imagine a circumstance in which being the victim of identity theft would force one to don a pirate costume and sing for tourists in a bad theme restaurant. That's not how it works.
For those readers fortunate enough or wise enough not to be acquainted with American television, I'm referring to this Freecreditreport.com ad. The song is catchy, the premise is puzzling. (But at least not inhuman, like this similar ad, in which our singing pirate advocates checking your beloved's credit rating and, if it is low, breaking up with them. True love, apparently, must first consult the opinions of Transunion, Equifax and Experian.)
I suppose the idea is that our troubadour's low credit rating has forced him to take a second job in order to pay the premium prices of the PPR, and that the only second job available to him was the pirate gig. Or something like that.
While I applaud the revival of jingle-based advertising, FreeCreditReport.com's campaign is based on an absurd lie: the idea that you are responsible, in any way, for fraud committed against a third party by criminals pretending to be you.
Imagine that I put on a pair of glasses and some fake bushy eyebrows and I walked into Warren Buffet's bank. "Why hello there Mr. Teller at Warren Buffet's Bank," I would say. "As you can see from my glasses and bushy eyebrows, I am Mr. Warren Buffet. Please withdraw $20 million from Mr. Buffet's, which is to say my, account, and give it to me, Mr. Warren Buffet."
That, in its simplest form, is what "identity theft" means. The above scheme is unlikely to succeed, but a related scam -- a kind of protection racket based on that scheme -- has proved immensely successful in extorting money from consumers every day.
This secondary scam isn't run to defraud money from banks, it's run by banks to defraud money from their customers. The name of this racket is "Identity Theft Protection."
In this scam, Warren Buffet's bank tells Mr. B. that they are liable, at any moment, to hand over all of his money to the next person who walks into their lobby wearing glasses and fake bushy eyebrows. The bank, they explain, would be helpless to prevent such an occurence. However, for a small fee -- say $20 or $30 a month -- the bank would be willing to offer him Identity Theft Protection. In exchange for this fee, the bank explains, they won't give Warren Buffet's money to anyone who can't prove he really is Warren Buffet. Otherwise, it seems, they can't be expected to distrust or doublecheck anyone who makes such a claim. So the bank is trying to charge an additional $240 or $360 a year to do what it's supposed to be doing anyway.
The bottom line here is, as Kevin Drum put it, "You Own You": "When identity thieves open an account in your name it should be the bank's problem -- not yours." Kevin neatly summarizes the ID-theft protection racket:
For their part, the major credit-reporting bureaus -- Experian, Equifax and TransUnion -- don't seem to care much about the accuracy of their credit reports. In fact, they actually have a positive incentive to let ID theft flourish. Like mobsters offering "protection" to frightened store owners, credit-reporting agencies have recently begun taking advantage of the identity-theft boom to offer information age protection to frightened consumers. For $9.95 a month, Equifax offers "Credit Watch Gold," a service that alerts you whenever changes are made to your credit report. Experian and TransUnion offer similar services. In effect, customers are being asked to pay credit agencies to protect them from the negligence of those same agencies.One way to cut down on identity theft would be to require commercial credit-reporting bureaus to offer services like this to all their consumers for free. After all, the credit-reporting agencies are the ones who are failing to ensure that their reports don't unfairly penalize victims of ID theft.
That whole article is worth reading for a sane corrective to the bizarre, upside-down view relentlessly promoted by the moneylenders and credit reporting agencies desperate to blame the victims and to put all of the responsibility for preventing identity theft on consumers. That view -- the official one, not Kevin's -- is simply insane. It makes no more sense than arguing that Ronald Reagan was responsible for the bank robberies in Point Break just because Patrick Swayze was wearing a Reagan mask when he committed them.
One more level down, the infectious jingles sung by FreeCreditReport.com's Beck impersonator are also based on another, even more insidious lie -- the notion that one's "credit score" is a worthwhile, accurate or reliable measure of trustworthiness. Failure to make timely payments is one possible reason for a lower "score," but so is the failure to have large amounts of disposable income. By confusing and falsely equating those two things -- being untrustworthy and being poor -- our current obsession with credit scoring feeds into the mythology that the poor are poor because they are less deserving, less moral, less worthy than the rest of us.
A credit score, in other words, is not just an inaccurate and misleading metric; it's also an evil one.
Jamoche, I called my card company and insisted on getting a sales rep who could make a note on my file that no cheques were to be sent... ever... I said that if they ever were then I would not only change my card, but I would have them infront of whatever business bureau I could find to charge them with fraudulent practices since I had specifically asked that this 'service' not be provided.
Ya, I had to get to a manager before the note was added, but I haven't had a single cheque in the mail since.
I also hate that it takes that kind of effort on my part to stop getting blank cheques sent to a unsecured location (my mailbox).
Posted by: kodiak | Apr 28, 2008 at 02:21 PM
There are a lot of people boggling over what raises and lowers your credit score. As with most things financial, there's not a lot of point applying moral (or even common-sensical) perspective to the process. It's all cold, hard statistics. They aren't looking for trustworthiness, or responsibility, or reliability. They're looking at a number of factors, comparing them to a massive historical database, and saying that people with similar factors resulted in a certain amount of profit. That's all. Sometimes it makes sense (like a history of bankruptcy lowering your score), and sometimes the reasoning is a bit more abstruse (like a certain number of certain types of loans with a certain current/available balance ratio being good, and any other mix being less good). The banks don't give a rip about what virtues or vices contribute to these factors. They just plug in your numbers and see where you fall.
If you're not profitable, you're not a person. Why don't they just look after your credit for free? Because it's not profitable.
I normally pay for my hummers with cash.
Er, wait...
(good) Puns aside my grandfather payed for every car in his life in cash. "Banks are a scam," he keeps saying, he only ever deposited or withdrew money from a single savings account, he doesn't have a credit rating to this day. I guess working 330 days a year 10 hours a day for 50 years gives you that kind of fiscal liquidity to throw around.
Posted by: practicallyevil | Apr 28, 2008 at 02:28 PM
One more level down, the infectious jingles sung by FreeCreditReport.com's Beck impersonator are also based on another, even more insidious lie -- the notion that one's "credit score" is a worthwhile, accurate or reliable measure of trustworthiness.
While obviously a number is just a number, as a matter of statistical truth people with low credit scores are a higher credit risk. It's unfortunate, but it's the simple factual truth in the aggregate.
In fact, not only is it a good predictor of the probability of paying bills on time, it's a reasonably good statistical first approximation of one's overall personal responsibility. Assuming you're insured with one of the major companies, your auto insurance rate is at least partially determined by your credit score. Believe it or not, in one year 1000 people with high credit scores will have fewer accidents than 1000 people with low credit scores. Auto insurance companies take this into account. I know, I used to work for State Farm.
Again, this is nothing against people with low credit. Heaven knows I'm not rich. But it's hardly "evil" to take credit history into account. It's just acknowledging the facts.
Posted by: Matt | Apr 28, 2008 at 02:28 PM
Raka, while you make excellent points about the details of the process, the real issue is the effects that it has on borrowers. The credit industry's use of statistics to maximize profit amounts to playing games with people's lives. Rewarding borrowers who pay more interest reminds me of casinos rewarding high-roller gamblers with comped hotel rooms and meals. Anyone have any experience with non-profit lenders?
Posted by: Tonio | Apr 28, 2008 at 02:28 PM
Myriad: ...credit score system was developed roughly 18 years ago in response to deregulation of banking. basically, as banks became larger and larger, and more competitive, it became less likely that your average loan officer would know the potential customer walking in the door asking for a loan. or even that said potential customer would have an account already with the bank on which to base some judgement...
Sort of, but not really. Every institution already had rules about income, debt, and credit history for potential borrowers. The power of the average loan officer to decide on an application in the absence of the appropriate numbers has always been quite limited. Underwriters inevitably insist on objective standards, so the power of the loan officer is mostly to say "no" to an application that is acceptable on the face, rather than vice versa.
Central credit reporting agencies did make it easier to see a more thorough history of a potential borrower, which benefited all lenders. But it didn't provide a competitive benefit for any particular lenders, which should raise suspicions. Any time a large financial institution claims to be doing something for the common good, check your wallet.
The key was deregulation of banks, but not because of the reasons you mention. Deregulation allowed the buying and selling of debt and risk in ways that were unprecedented. To effectively trade in these abstracts, a universal metric was required to establish a relatively objective value for a given loan-- if First National Bank and Bank of the Nation One use different criteria when handing out loans, I can't use the same risk multiplier to determine the actual value (vs the face value) of the loans I want to buy. A universal credit rating means I can buy and sell these things all day without really looking at them. Yay!
Posted by: Raka | Apr 28, 2008 at 02:33 PM
If you're persistent, Jamoche, you can convince your various creditors to send you bills and legal information only. Every six months or so, I go through and try to purge all extraneous paper from my mailbox, and I've found the companies to generally be helpful. The more obnoxious companies may need a manager to put the note in your file, but it can be done.
Posted by: Cyllan | Apr 28, 2008 at 02:40 PM
practicallyevil: If you're not profitable, you're not a person.
In all fairness, if you're profitable you're not a person either. You're just a desirable statistic.
Why don't they just look after your credit for free? Because it's not profitable.
And therein lies the key to eliminating the credit protection scam. Change the laws so that lenders are on the hook for the consequences of identity theft, and they'll do spinning backflips through hoops to prevent the crime in the first place. Granted, any industry solutions will no doubt have their own sets of consequences, and the poor will again suffer the brunt of them. Getting away from that is something of a larger issue, though.
Posted by: Raka | Apr 28, 2008 at 02:45 PM
Tonio: Rewarding borrowers who pay more interest reminds me of casinos rewarding high-roller gamblers with comped hotel rooms and meals.
That's a pretty good analogy, actually. I don't particularly like it, and I certainly don't think the practice of judging by statistics should be taken to logical extremes. But I don't have much in the way of a good alternative to the system as it stands.
We already have rules in place to put limits on what statistics can and can't be used for credit (and insurances and other such numerically reductionist systems). Your credit ratings (or insurance premiums) can't be based on the color of your skin or hair, even if there is a statistical correlation between that and risk. These are good restrictions, and continued vigilance is necessary to keep the industries from functioning as a can of gas on the ever-burning flames of class warfare. Vigilance requires a certain degree of transparency, which is also good. But it is very possible to legislate and regulate the profitability right out of an industry, which is much less good. "Trickle-down" doesn't work worth a damn, but "crushing iron fist" is no real improvement. There has to be a balance, and that balance will inevitably be somewhat inefficient and somewhat unfair.
What would you do to shift the current balance?
Posted by: Raka | Apr 28, 2008 at 02:59 PM
What would you do to shift the current balance?
For one, offer low-interest federal loans to start non-profit financial cooperatives, either as new entities or as expansions of federal credit unions.
There has to be a balance, and that balance will inevitably be somewhat inefficient and somewhat unfair.
I agree. This issue isn't the same as health care, where the insurance companies are middlemen squeezing money from both providers and patients. Other than expanding the non-profit sector, I know of no alternatives.
Posted by: Tonio | Apr 28, 2008 at 03:16 PM
[enter Homer stage left, wearing fake mustache]
"Hello. My name is Mr. Burns. I believe you have a package for me."
"What's your first name?"
"I...don't...know."
Posted by: Ian | Apr 28, 2008 at 03:36 PM
Amaryllis: And for that matter, why can a credit-card company change its agreement with me, when I don't have a reciprocal privilege?
You don't have to accept the changes. You can choose to cancel your card and seek credit elsewhere.
Posted by: aunursa | Apr 28, 2008 at 03:47 PM
But it is very possible to legislate and regulate the profitability right out of an industry, which is much less good.
It might be "much good" for industries such as cigarette manufacturers.
Posted by: Jeff | Apr 28, 2008 at 03:56 PM
Amaryllis: And for that matter, why can a credit-card company change its agreement with me, when I don't have a reciprocal privilege?
aunursa: You don't have to accept the changes. You can choose to cancel your card and seek credit elsewhere.
And in most (all?) states, the credit card company is obliged to inform you of changes before they take effect. And while "cancel[ing] your card and seek[ing] credit elsewhere" isn't always a simple matter, particularly if you have a large balance that you can't just pay off immediately, it's not as bad as it seems. There are also statutes that allow you to more or less lock the account as it existed under the old rules, though new charges may or may not enjoy the same protection. The lenders don't make that clear, but "bend over and take it" isn't always your only option.
This doesn't apply to everything-- for instance, your initial agreement almost certainly permitted a range of interest rates that they are allowed to apply under certain circumstances. Still, quite a bit can be successfully appealed or protested.
Posted by: Raka | Apr 28, 2008 at 03:58 PM
A credit score, in other words, is not just an inaccurate and misleading metric; it's also an evil one.
Spare us the melodrama. The amount of liquid assets you have available is a perfectly rational thing to look at when trying to judge someone's ability to repay a loan. Your attitude will just lead to another liberalism-created credit crunch:
http://www.independent.org/newsroom/article.asp?id=2114
where the left complains their supporters can't get loans, then force lenders to loan to them, and when it turns out they can't repay (like the lenders originally said when they weren't lending in the first place), claim those loans were exploitation and demand they be forgiven. Dishonest? Yes, but since it results in money going from the wrong people to the right ones, who cares?
Posted by: randlebrot | Apr 28, 2008 at 06:16 PM
While I can't offer an informed contribution on the credit ratings and the decision-making policies of financial institutions, I do fully support the merciless slamming of those inane freecreditreport.com commercials wherever possible.
Posted by: Vermic | Apr 28, 2008 at 06:26 PM
Randlebrot, have you ever bought a car? I used to work in the regulation of car dealers, and I saw thousands of credit contracts for vehicle purchase. In every single one, the purchaser had been assured that they were perfectly credit-worthy, and since the dealerhsip had immediate access to the purchaser's credit information, there was no reason to doubt this. Consumer goes home in the new vehicle and leaves old car at dealership. The dealership sells the old car, then, lo and behold!! discovers that no finance company will buy the note at the stated rate. Purchaser has to come back in and agree to higher payments or lose the vehicle. Of course, their old car is gone now, too, so either pay or lose everything. What allows this is something called a "conditional sales agreement" which states that while the consumer is bound by the contract and can't reconsider, the seller is only bound if it can find a finance company to buy the note. Normally it's not a contract if one party is bound but the other one can get out of it, but in the case of credit purchases by less-than-stellarly-rated consumers, that rule doesn't apply. There are dozens of other instances in which lenders did everything but force the consumer at gunpoint to sign the contract, then cried to Congress to underwrite their stupid loans. If businesses can play that game, why not consumers?
Oh, and go jump in a cold, polluted lake. With alligators.
Posted by: Karen | Apr 28, 2008 at 06:26 PM
But is there any way to stop getting blank "checks" in the mail for the credit card?
These infuriated me, especially because I was getting them from my credit union, whose motivation is supposed to be providing quality service to members rather than churning up movement of customer's money with the goal of skimming a percentage off the top. Also because said credit union regularly mailed me info warning about the severe risk of identity theft from unshredded financial documents...just like the unsolicited ones they kept sending me.
I ended up dumping the credit union (which will rename nameless but whose initials are SFCU) and moved to a small commercial bank who promptly started sending me them too. (But I expected that from a commercial enterprise.)
I called the 1-800 number on the back of my card one day and said, "This really pisses me off; will you just stop it?" They said, "Sure." No more "convenience" checks.
Posted by: DN | Apr 28, 2008 at 06:33 PM
But it's hardly "evil" to take credit history into account. It's just acknowledging the facts.
Except that there are a number of factors that contribute to a person's credit history that they can't control. If your parents have bad credit, they will raise you poorer and then you will also have difficulty paying off your debts. Having bad credit already can make it hard to get the credit cards and car loans that will help you increase your score.
They start scoring your credit before you even realize they are. You wake up one day and find out that ever since you turned 18 someone's been secretly scoring your worthiness based on your credit and making you pay higher rates just because....you are poor and struggle to repay bills. Or even blaming *you* for other people's credit mistakes.
And like it's already been mentioned, people are using credit scoring to judge whether you're allowed to rent an apartment, or be hired for certain jobs (jobs that have nothing to do with whether you have good credit or not).
I love how people keep talking like credit scoring happens in a vacuum. Like social factors have no affect on bill paying or level of debt.
Posted by: cosmicdancer | Apr 28, 2008 at 06:40 PM
In every single one, the purchaser had been assured that they were perfectly credit-worthy, and since the dealerhsip had immediate access to the purchaser's credit information, there was no reason to doubt this. Consumer goes home in the new vehicle and leaves old car at dealership. The dealership sells the old car, then, lo and behold!! discovers that no finance company will buy the note at the stated rate.
What does a liar selling cars have to do with credit ratings? (And isn't this easy enough to avoid by simply not turning over your car until you have the loan and replacement car? Are you claiming that's only something the rich can do or that the poor are too dumb to figure that out?)
Posted by: randlebrot | Apr 28, 2008 at 07:05 PM
Except that there are a number of factors that contribute to a person's credit history that they can't control. If your parents have bad credit, they will raise you poorer and then you will also have difficulty paying off your debts. Having bad credit already can make it hard to get the credit cards and car loans that will help you increase your score.
Sorry, I didn't see this when I was hitting 'Post'. If your being raised poor means you "have difficulty paying off your debts", then you have difficulty paying off your debts, which is a perfectly moral thing to take into account when trying to decide whether or not to loan you more money.
Why does the left simultaneously claim both that credit companies exploit the poor and force them into debt slavery when they loan them money, and also that they discriminate when they don't make those loans? Don't you want the poor to stay away from the exploitation of interest bearing debt?
Posted by: randlebrot | Apr 28, 2008 at 07:08 PM
I love how people keep talking like credit scoring happens in a vacuum. Like social factors have no affect on bill paying or level of debt.
Credit ratings could be based on a pygmy marmoset flipping a coin, as long as it was an accurate predictor of a person's probability of paying back their debt. Of course credit scores don't happen in a vacuum. But they are a very good mathematical predictor of if a loan will be repaid. And it turns out they're a good predictor for a lot of other things.
Remember if a credit card company gives out a lot of credit cards to people with poor credit ratings, they will experience more defaults. That hurts the people who do pay on time, because then the company has to increase rates to stay solvent. It also hurts the low-to-mid income investors whose retirement plans likely include various banks and lenders in their portfolios. If it's evil to use a credit rating, surely it must be even more evil to hurt those people who try to be responsible with their money.
Posted by: Matt | Apr 28, 2008 at 07:24 PM
Aaaaaaaaand randlebrot replaces Scott as TBLoS [*] ("there can be only one!"). Whooooot!
I can't wait until he uses the "gun in the face" arguement!
[*] The Brainless Libertarian [**] of Slacktivist
[**] Mabus seems to be one of the few that's not **totally** brain-dead, but their number is vanishingly few.
Posted by: Jeff | Apr 28, 2008 at 07:26 PM
The political left as a whole wants poor people to have access to loans that aren't predatory, and to hold financial institutions accountable for their own irresponsible behavior. That's not a difficult concept to wrap your head around.
Posted by: Turcano | Apr 28, 2008 at 08:55 PM
Jeff: Mabus seems to be one of the few that's not **totally** brain-dead, but their number is vanishingly few.
I'm also not **totally** libertarian. I expect anyone with power to attempt to exploit me, including both government and big business. Government just happens to be the more powerful, and therefore the more dangerous, of the two. In principle, it would be nice if we could do without both; in practice, we have to play them off against each other. (In addition, "real" libertarians don't trust me because I'm religious.)
Turcano: The political left as a whole wants poor people to have access to loans that aren't predatory, and to hold financial institutions accountable for their own irresponsible behavior. That's not a difficult concept to wrap your head around.
Although I don't entirely agree with our new troll, he has the legitimate point that nonpredatory loans to the poor are too high-risk to be profitable--therefore no one really wants to offer them. I've been at least marginally aware of this problem, humorously enough, since I was five or so--my parents divorced, my mother desperately needed money, and of course there was no way for her to get a loan. My response: "Why would rich people need a loan?" It wasn't till much later that I began to understand the system, of course.
In General: I must admit that I'm a little baffled by the "blame the banks" response. Banks should, of course, maintain a reasonable level of security, but there is undoubtedly a limit as to what they can do (I don't know quite what that limit is, but they must pay their employees, after all). Surely the people actually to blame, and who should be punished, are the identity thieves themselves. I have the humorous image of a historical bank being held up by Jesse James, and the manager being put in jail for the crime, instead of the outlaw.
Posted by: Mabus | Apr 28, 2008 at 10:39 PM
>So far we have resisted the Hummer-buying temptation.
So you're not a tool of the patriarchal oppression.
Posted by: spinetingler | Apr 28, 2008 at 10:49 PM
The actual, truly free, government-mandated credit report site is:
http://www.annualcreditreport.com/
None of the other variants are actually free, unfortunately.
Posted by: Alexis | Apr 28, 2008 at 11:18 PM
Re: Matt upthread
Believe it or not, in one year 1000 people with high credit scores will have fewer accidents than 1000 people with low credit scores. Auto insurance companies take this into account. I know, I used to work for State Farm.
Again, this is nothing against people with low credit. Heaven knows I'm not rich. But it's hardly "evil" to take credit history into account. It's just acknowledging the facts.
"Believe it or not, in one year 1000 people with black skin will be convicted of more murders than 1000 people with white skin. Police take this into account. [...]
"Again, this is nothing against people with black skin. [...] But it's hardly 'evil' to take race into account. It's just acknowledging the facts."
If a credit score were just a number nobody believed in, there would be no problem. But it isn't. It's used for credit cards, it's used for home loans, it's used for rental deposits, and it's used for employment(!). The credit score, unashamedly a hodgepodge of financial data weighted with no a priori reasoning, is abused to great effect with nothing more than the bludgeon of "correlation."
Just as police aren't allowed to use race as the basis for arrests, institutions have the moral duty to use only -causative- factors in their reasoning. I have no problem with "we can't give you a loan because you've defaulted on the past three."
I do have a problem with "we're not going to hire you because your credit score is three points shy of our cutoff." I have as much problem with that as I do with "we're not going to hire you because you're a woman and statistically more likely to take maternity leave."
Unless (editorial) you can prove a causative link between the credit score and whatever, you have no business using it.
In a democratic society, the fixed pursuit of profit at all costs must give way to legal equality of opportunity. If and when that doesn't happen, society quickly changes from "one person, one vote" to "one dollar, one vote."
Posted by: Majromax | Apr 28, 2008 at 11:34 PM
In General: I must admit that I'm a little baffled by the "blame the banks" response. Banks should, of course, maintain a reasonable level of security, but there is undoubtedly a limit as to what they can do (I don't know quite what that limit is, but they must pay their employees, after all). Surely the people actually to blame, and who should be punished, are the identity thieves themselves.
The "blame the banks" response is the natural conclusion of the banks' prime purpose: to hold my money.
If I gave you a piece of property, told you to hold it for me until I wanted it back, and paid you for the privilege, I would have a right to expect it back when I wanted it.
If I came for it and it wasn't there, the excuse "Well... this guy told me he was you, you see..." wouldn't hold up. The common-sense interpretation is that you were at least negligent in your duty to give the property back only to me.
What we see here is the massive realization that "whoops, one long number and a couple short numbers aren't enough to prove identity!" The banks disclaim responsibility because the clients actively used credit and debit cards. The clients have the sensible opinion that since the banks were the ones that issued those cards in the first place, the banks had a responsibility to make sure that they were secure.
I have the humorous image of a historical bank being held up by Jesse James, and the manager being put in jail for the crime, instead of the outlaw.
Actually, that's a wonderful example. If the bank vault is broken into, customers don't lose their money. Banks carry theft insurance precisely to stay solvent if just such a thing happens.
The "Blame the Banks" view actually makes the crime of identity theft more serious. If the banks are ultimately responsible for replacing what is lost, then identity theft is bank robbery.
Posted by: Majromax | Apr 28, 2008 at 11:46 PM
"Believe it or not, in one year 1000 people with black skin will be convicted of more murders than 1000 people with white skin. Police take this into account. [...]
"Again, this is nothing against people with black skin. [...] But it's hardly 'evil' to take race into account. It's just acknowledging the facts."
That's a pretty epic stretch. High crime areas of any color are generally more heavily policed. Free-spending people of any color generally have bad credit ratings. In neither case should race (or sex, national origin, religion, or whatever) be taken into account. The only quantity of interest is the raw numbers of crime or credit, and the epiphenomena of race just in some cases happens to also be present. If a particular black, white, asian, or green area happens to have high crime, it really does deserve better police protection. If a particular person with bad credit happens to belong to a certain class, race, or whatever, it really is still irresponsible to good creditholders, the bank's investors, and the low-score person himself to offer easy credit.
Posted by: Matt | Apr 28, 2008 at 11:52 PM
I do have a problem with "we're not going to hire you because your credit score is three points shy of our cutoff." I have as much problem with that as I do with "we're not going to hire you because you're a woman and statistically more likely to take maternity leave."
Sorry for the two posts, but I forgot to mention I agree with you entirely here! Not really because correlation by itself is illegitimate, but because things like looking for employment while having low credit or having children are perfectly good things that should not ever be held as a negative in hiring situations or similar. Even if there is correlation, it's clearly wrong to hold a good thing against someone even if it does raise risk slightly.
Credit scores are good things with good uses, but they can and are often abused. I'd love to see much more openness and scrutiny in their use, for a start.
Posted by: Matt | Apr 29, 2008 at 12:00 AM
Re: Matt to clear up a misunderstanding
If a particular person with bad credit happens to belong to a certain class, race, or whatever, it really is still irresponsible to good creditholders, the bank's investors, and the low-score person himself to offer easy credit.
Oh, I agree that a credit score has plausible, valid use in issuing credit. If my post appeared to say otherwise, my apologies. A credit score, insofar as it reflects credit behaviour, is a perfectly valid tool for judging credit.
I was very much taking issue with its use for car insurance, because a credit rating has nothing (causative) to do with driving, just as race has nothing to do with driving.
The law currently doesn't support this view, of course. I think it will eventually change -- discussion of "genetic discrimination" is a start. When there is a power imbalance in any relationship (corporate or governmental), "protected classes" should be the norm rather than the exception, and the burden of proof should be on the powerful to demonstrate the causative factor.
Posted by: Majromax | Apr 29, 2008 at 12:26 AM
I think checking somebody's credit report as a condition of employment only makes sense if the prospective employee will be handling money. Somebody who has a habit of piling up bad debt may be more tempted to steal. But even so, looking at a criminal and civil background check would provide more accurate information about whether the prospect is in fact a thief or a borrower in bad faith.
Posted by: Jenny Islander | Apr 29, 2008 at 01:36 AM
Let's imagine that I, Bugmaster, am in the business of giving people loans. My business model is conceptually simple: I decide whose loan applications to reject, whose to accept, and at what percentage. However, the devil's in details. If I act too conservatively, and reject too many applicants (or offer them too high a percentage rate, which they won't take), then a rival loan company will get their money, instead, and they might stomp me into the ground. If I act too liberally, then I won't be able to absorb the hits when my customers inevitably default on my loans, and I'll go out of business. In order to make the right decision, I'm working day and night to maintain and improve a statistical model that will tell me how much money to loan, and to whom.
Let's say that I have determined that, for some reason, black women who eat quiche are 5% more likely to default on their loans than everyone else (*). I have no idea why that happens. Maybe the chemicals in the quiche interact with the estrogen in their bloodstream, using melanin as a catalyst, and that makes them 5% more crazy than everyone else (hey, I'm a banker, not a biologist). Maybe quiche is devilishly expensive and addictive, and thus the female black quiche eaters end up spending all their income on that, as opposed to loan repayment. Maybe it just so happens that quiche eating is popular in poor communities, who are more likely to default on their loans no matter what. Maybe black women who eat quiche are more likely to have gastrointestinal problems, and they spend all their money on fixing them. I don't know, but I don't really care. All I know is that I can very accurately predict the probability of my customers defaulting on their loans, and this gives me the edge over the competition, so I can give more loans to more people, and make more money in the end.
Now, you come along, and tell me that discriminating by gender, skin color, or eating habits is wrong, and therefore I should ignore my model, and give loans to black female quiche eaters as though they were white male sandwich eaters, or Slavic pinecone eaters, or whatever. I know, with a very high degree of certainty, that doing so will make me lose money, but you won't relent until I can prove a causative link between quiche and defaulting on loans.
There are several things wrong with this.
Firstly, private corporations are not charities (whose job it is to help the less fortunate), nor are they the government (whose job it is to collect taxes and spend them on a safety net so that people don't become less fortunate and stay that way). By imposing your uniform loan rules, you're giving me a huge disincentive to run my business -- since I know, with a high degree of certainty, that by following your rules I am going to lose a lot of money. So, I'll probably move on to some other business, and won't give any loans to anyone. Secondly, by imposing your rules, you are de facto assuming a part of my responsibilities; you are going to run my business, at least in part. Running businesses is a tough job, that requires a lot of effort, and, ultimately, money. Regardless of what I do, you're going to have to spend that money -- money that you could have donated to charity or invested into health care.
Ultimately, then, I believe that you would be wrong to impose such stringent limits on my business. I can foresee (**) some objections, so I'll list them here pre-emptively:
1). "If you aren't willing to loan equally to everyone, you don't deserve the right to loan to anyone." I don't think that this is an issue of morality at all; in general, I do not believe that refusing service to certain customers is an immoral act, in and of itself, as far as private business is concerned.
2). "The private sector shouldn't be giving out loans, anyway; this is the government's job". I think the government would be quite bad at it (especially our current government, seeing as we're digging another billion-dollar hole every day).
3). "Usury is wrong, period". The Koran makes this point, AFAIK. We can argue it further, if you wish, but I don't think many people here will take the most radical interpretation of this point.
4). "Loan companies have too much power, because they have no competition". I actually agree, but this is an argument for tighter anti-monopoly regulation, not for more stringent control over the day-to-day operations of the competing loan companies.
5). "Credit ratings are a sham; they're not an accurate predictor of anything". I think that there's certainly a lot of predictive power to those ratings, seeing as people still use them; however, obviously they aren't as accurate as Experian et al claim. See (4).
6). "You're a libertarian capitalist pig-dog". Amusing, but wrong. There are no dogs at all in my lineage.
I think you're confusing economy and democracy (though they are linked, albeit indirectly). Regardless of how awful your credit rating is, you can still vote.(*) In true Patriarchial fashion, I'm trying to oppress as many fictional people as possible in my example.
(**) And by "foresee", I mean, "recall from our past threads". Time travel is spoooooky !
Posted by: Bugmaster | Apr 29, 2008 at 03:19 AM
Most interestingly, no one seems to draw the conclusion that Americans are being billed to create the world's first (seemingly) profitable police state. I won't bother to go into details that are now literally decades old, but replace 'papers, please' with credit card/FICO/store card in just about all facets of just about all Americans' lives, and there you are - a fully functioning Überwachungsstaat. German is just so handy when dealing with these subjects - the language is full of technical terms which English tends to lack, though 1984 does offer a bit of insight - Newspeak often seems perfect in a country where a flag pin says more about patriotism than what laws were broken while wearing one - I bet the thugs in the White House had their little membership pins on their lapel while discussing torture. Another unfortunate echo from Germany, where even church figures would pin their little sign of supporting the homeland on their vestments - after all, supporting the homeland and being a good Christian was easy, since the screaming from the torture cells (oops - 'enhanced interrogation rooms' - that translation is perfect) was generally well muffled. Or well deserved, in the cases of those who didn't believe in the Christian ideals espoused by those pin wearing church authorities.
And why this unpleasant diversion? Because the credit system is already turning into an enforcement mechanism - do read up on various 'know your customer' regulations, for example. Or how travel is becoming increasingly impossible with cash alone. Or notice how difficult it is to purchase anything quickly on the web without said purchase going through one of only a couple of databases.
I have never had a credit card, nor have I ever been in debt - which makes me even more of an outsider than my unpleasant style of talking about the country I was born in being run by lying torturers and murderers.
And for those that can't imagine living without a credit card/score - you are truly part of the system, and nothing will change as long as you don't. Nothing may change if you do change, of course. Somehow, however hard we pretend otherwise, morality is always a question of profit in the end, isn't it?
Debt peonage combined with biometrics - a solution to a problem most of us had never imagined existed, and one which many of us will never solve.
Kredit macht frei.
Posted by: not_scottbot | Apr 29, 2008 at 07:23 AM
Matt, two problems with that. First credit history gets applied where it might, if the person/company getting paid money is very worried about their cash flow, it might barely belong, but creates an extra tax on being poor for no reason, and acts to trap people in poverty. Rent is the most nefarious of those, because the "poor tax" can easily amount to more than 100% on a good that comes right after food in terms of necessity. Not being able to open a bank account comes a close third.
The other is that (don't know about the US, but in Germany) the scoring is the mess you'd expect from a giant database with input that is not controlled for quality. You can earn more than 100K (Euros, in this case) and never have been late on any payment in your life and yet not get a cell phone contract because of some glitch in the database, or because you did price comparision before taking up a credit for a car.
Posted by: inge | Apr 29, 2008 at 08:17 AM
Karen: Oh, and go jump in a cold, polluted lake. With alligators.
Poor alligators.
Posted by: inge | Apr 29, 2008 at 08:23 AM
Randlebrot: If your being raised poor means you "have difficulty paying off your debts", then you have difficulty paying off your debts,
Especially as your being raised poor means you have to pay twice the interest that someone being raised rich would pay. Twice so, if being raised poor leads to a credit rating that damages your ability to get into well-paid jobs.
Of course, the banks themselves have no horse in the race on whether or not they are creating a class of lifelong serfs, so it is unreasonable to expect them to stop playing their number games.
Just like, as long as the costs of identity theft are not theirs to pay, it would be unreasonalbe for them to sink money into protection from it.
Posted by: inge | Apr 29, 2008 at 08:30 AM
Credit reports and jobs...
I work with classified material. If my credit is bad, I may be a risk for being bribed.
(worse: because I'm a risk for being bribed, they'll fire me. So I hide my credit problems. Now I'm a risk for being blackmailed.)
Terry Pratchet had some good comentary on rich and poor in the 'Night Watch' books. Commander Vimes noted that, as a wealthy man, he could afford a pair of boots that cost $50 that would last ten years. When he was poor, he had to settle for $5 boots that had to be replaced every three months. As a poor man, he paid more for boots than a rich man... no wonder he was always poor.
Posted by: Hawker Hurricane | Apr 29, 2008 at 09:00 AM
Mabus: my parents divorced, my mother desperately needed money, and of course there was no way for her to get a loan. My response: "Why would rich people need a loan?"
Which is what infuriates me about all this "hey, we want to lend you money" dead tree spam I'm getting. I'd like to tell them, "I don't need your money. If I needed it, you would not offer it to me. All this is good for is to try to convince me to make myself miserable by buying things I cannot afford and do not need so you can make a profit. Now FOAD."
Posted by: inge | Apr 29, 2008 at 09:07 AM
Heh. And of course, no financial institution would talk someone into taking out a mortgage they couldn't keep up....
Contrast with Grameen Bank, which makes microloans to the very poorest of the poor, with a payback rate that should be the envy of all the world.
Posted by: Lila | Apr 29, 2008 at 09:47 AM
Bugmaster: Now, you come along, and tell me that discriminating by gender, skin color, or eating habits is wrong, and therefore I should ignore my model, and give loans to black female quiche eaters as though they were white male sandwich eaters, or Slavic pinecone eaters, or whatever. I know, with a very high degree of certainty, that doing so will make me lose money, but you won't relent until I can prove a causative link between quiche and defaulting on loans.
I'll take this one up. The government in this case is assuming the role of determining causation. They have decided (rightly or wrongly) that your observation is correlative but not causative. If they are right, then your practices are self-reinforcing. By denying cheap credit to black female quiche-eaters (BFQEs) you deny them opportunities and thus keep them in circumstances which will contribute to their uncreditworthiness. If you provide BFQEs credit at the same rate you do anyone with similar scores on the metrics you are allowed to use, then (the theory goes) over time the statistical correlation between BFQEs and loan defaults will diminish.
Whether or not it's an appropriate role of the government to be engaging in such socio-economic tinkering is a reasonable question, but I suspect that most of the board members (myself included) will pretty readily say "yes". Regardless, the burden of such tinkering is not dropped on you, the statistics-savvy lender. Since all of your competition labors under the same restrictions, the burden is effectively passed on to the entire consumer class as a whole. This is a strong argument for putting such restructuring into the hands of government rather than relying on the market; when successful, it's a mid- to long-term gain for everyone, but individual market actors instituting such an egalitarian policy would be committing short-term suicide.
For what it's worth, I think "proving a causitive relationship" between almost any inborn attribute or past behavior and one's future behavior is ludicrous on the face. Any statistical analysis will be arbitrary and unfair when applied to the individual. That's why I don't support attempts to legislate unfairness out of existence. But the electorate is very well within its rights to identify particular aspects of unfairness which are particularly egregious and/or destructively self-perpetuating, and then to take remedial steps. Slow, lurching, hesitant steps with frequent stumbling backwards. But steps nonetheless.
Posted by: Raka | Apr 29, 2008 at 10:00 AM
I was very much taking issue with its use for car insurance, because a credit rating has nothing (causative) to do with driving, just as race has nothing to do with driving.
As a mother of a teenage son, who is due in a couple of years to send my car insurance rates through the roof, I can't help agreeing with this.
If, however, I owned stock in State Farm, I would think this position insane.
Look. Can we agree that credit ratings and other metrics are appropriate tools for that which they are designed -- credit ratings indicate your likelihood of paying back loans*; youthful testosterone indicates your likelihood of getting into auto accidents; buying a busload of Bujold from Amazon indicates my likelihood of also buying Weber; etc -- and that there is nothing either illegal or immoral in private industries in a capitalist economy using those metrics to maximize profit? If not, why not?
As I see it, the problems with metrics a threefold, and it is worth carefully distinguishing them in this discussion:
a) reasoning from the general trend to the specific individual: As it happens, I love Bujold but can't stand Weber. Amazon's insistence that I *must* causes me no more harm than a fleeting annoyance, and causes them no more harm than wasting an opportunity to sell me something I like better.
b) Transference: This involves taking the metric and using it for something that it was not designed for. Now it may be true that people who like David Weber's books are statistically more likely to be Bad People who Smell Funny and Don't Pick Up Their Socks. There is a problem, though, if my Bujold-love is used to triumph over the fact that I am personally Good, Pleasantly Scented, and Tidy. If this correlation were confused with causation, liking Weber could make it more difficult for me to obtain some necessity of life (like home, or education, or transportation, or employment), that would be a SERIOUS problem.
c) Mixing the private and the public sphere: Again, I don't have a problem with Amazon trying to sell me David Weber, nor do they. I find the convenience of purchasing from them more important than the minor irritation of their faulty algorithm; they find the tidy profit they make from me more than compensates for my stubborn refusal to purchase their recommendation. However, if it suddenly became ILLEGAL to purchase Weber, and I in danger of arrest for the offense of Reading-While-Bujold-jonesing (in parallel with the all too common "crime" of Driving While Brown), metrics teeter over the edge from problematic to fascistic.
*Actually, a big causative factor in the current credit crisis was lending institutions FAILING to heed the predictive power of metrics while making loans!
Posted by: hapax | Apr 29, 2008 at 10:09 AM
Lila: Contrast with Grameen Bank, which makes microloans to the very poorest of the poor, with a payback rate that should be the envy of all the world.
A bit of devil's advocate here, but it's dangerous to generalize from Grameen's success. Large institutions reliant upon mass statistics abandoned the ultra-poor because the aggregate risk was too high, which incidentally stranded a number of individuals who were much more credit-worthy than their numbers might imply. Grameen noticed this underserved niche and stepped in, using a more complex set of metrics to identify these individuals and then providing them with financial packages and services under a different model (size, terms, length, etc) than the mass market used. It may be that expanding the scope of Grameen's model to the mass market level would be tremendously successful. Or it may be Sub-Primes part II.
Sub-prime mortgages spent decades as a completely legitimate niche vehicle. Borrowers who lacked a normal credit history or regular income sufficient to qualify for traditional loans could make their case to subprime lenders, who would evaluate a much wider set of criteria. Risk was a bit higher in the sense of not having as much statistical "certainty", but the default rates were generally quite low and the interest rates decently profitable without being predatory. The problem came when these mortgages started being bundled into securities and sold, which (due to their attractive profile) led to great demand, which created a market for all sorts of lenders to leap in and start handing out sub-prime loans to anyone who could sign their name. The risk model everyone was using was based on the historical performance of the much more limited sub-prime market of years past. Obviously, that model didn't perform so well when applied to the gold-rush behavior of the last few years, and now we're all paying for this latest lesson in the obvious.
Posted by: Raka | Apr 29, 2008 at 10:29 AM
I have not applied for any kind of credit recently, but every time in the last 18 months I have applied for a JOB, the potential employer has required a comprehensive credit check. Like drug screenings, this used to be something relatively few companies did, if they had reason to be particularly careful (like banks or hospitals, or stuff connected to military contracting.) The economy doesn't just push wages down; it means job applicants have less power to say, "I don't want to give you my social security number and all my financial information, and sign a release of all liability for a private investigator to check my credit and personal history, in the hope that you'll offer me a job in a non-discriminatory way. I'll go work for some other company that isn't so intrusive." So the intrusive practices spread to other industries. Not because they predict anything *useful*, but just because the private investigators market themselves well and the HR people say "you can't be too careful."
Posted by: Adrian | Apr 29, 2008 at 12:24 PM
Posted by: Bugmaster | Apr 29, 2008 at 02:35 PM
Although I don't entirely agree with our new troll, he has the legitimate point that nonpredatory loans to the poor are too high-risk to be profitable--therefore no one really wants to offer them.
There's a new concept that's been working very well to get around that: micro-loans. Loan enough to a poor person so that they can get a small business up and running. Enough will be paid back to support the next micro-loan, and on it goes. See MicroPlace or Kiva.
As for expanding this concept, perhaps combining the "banks" [*] that issue micro-loans isn't the answer (since fear of risk might overtake any economy of scale); but to expand the number of "banks". There will always be no "deserving" poor than loans.
[*] In the case of Kiva at least, the "bank" is a pool of small investors who use Kiva to lend to entrepreneurs.
=========================
Let's imagine that I, Bugmaster, am in the business of giving people loans.
Let's say that you, Bugmaster, are in the position of providing car insurance. You receive a report that Person X has a low credit score. Is it because they are a black female quiche eater? A Slavic pinecone eater? You don't know -- all you know is that they have a low credit score. How does that possibly factor into your calculations?
Posted by: Jeff | Apr 29, 2008 at 03:57 PM
Posted by: Bugmaster | Apr 29, 2008 at 04:36 PM
@Bugmaster
RE: "3" The Bible makes this point, too, it's just that mainstream Christianity and Judaism think the ban on usury does not apply to lending/borrowing at low interest rates, but mainstream Islam thinks it does.
RE: "5" Credit scores predict something, but I don't think it's what everybody assumes. A smart lender would much rather deny a loan to a creditworthy consumer than grant a loan to a somebody who defaults. Logically, then, the credit score identifies those who will be good customers and pay back their loans. It's like antlers on a deer: antlers predict maleness. Almost all deer with antlers are male. But if I see a deer without antlers, that does not indicate femaleness. It could mean the deer is a doe, or it could mean it is immature, or it could just mean it's the wrong season. A deer without antlers is only more likely to be female in the sense that the total population of antler-less deer excludes many males, but lack of antlers does not predict femaleness with the same reliability that posession of antlers predicts maleness.
Similarly, high credit scores predict creditworthiness, but low credit scores predict nothing. It may technically be true that somebody with a low credit score is more likely to default, just like it is technically true that a deer without antlers is more likely to be female. But that doesn't mean you can point at a deer without antlers and call it a doe. Car insurance agents, landlords, and employers have taken to using a low credit score to identify untrustworthiness, when really it is a lack of evidence of trustworthiness.
Posted by: Lauren | Apr 29, 2008 at 05:35 PM
Change the laws so that lenders are on the hook for the consequences of identity theft, and they'll do spinning backflips through hoops to prevent the crime in the first place.
Anyone else here old enough to remember "holder in due course"? Which meant that credit card companies sold your balance to a third party and it was incredibly difficult to get any recourse. It was nobody's problem but the card user's.
Once that was made illegal and caps set on a consumer's liability for fraudulent use of a card, suddenly toll-free numbers were prominently displayed for reporting loss or problems. Now I generally have to activate a new or renewed card by calling from the phone number they have on record. I have had calls to verify unusual spending patterns -- in fact I usually alert the company ahead of time if I plan to use the card outside the country.
I expect they'll be restoring holder in due course any moment now.
Posted by: hagsrus | Apr 29, 2008 at 05:44 PM
I don't expect - with only three players in the whole market - that the credit score coming from the big three will ever be pushed hard enough to be objectively rational. What might have enough incentive to become rational are credit scores assigned by individual lenders based on their own proprietary formulas using the raw data from the big three. I'd actually be a little surprised if banks aren't doing this already. (To bring this back on topic, I'd love for those formulas to evolve in an environment that penalizes heavily for extending loans to frauds)
Oh, and since it hasn't come up yet in this thread: www.annualcreditreport.com is the site that the three credit reporting agencies set up to answer the government mandate that they let you look the contents of your credit report (but not the score) once a year. That site is in fact completely free. The site whose advertisement has been much maligned is selling you a service which, if you pay for it, will also come with a "free" credit report. (If you ever forget the site name - it deliberately isn't as memorable as the site that results in pulling money from you - google "free credit report by law" and it should be the first search result. Just don't get tricked by the ad links that'll pop up)
Posted by: Daniel Martin | Apr 29, 2008 at 06:25 PM