FAIR MONEY

Face to Face with Inequality

Tag Archives: credit score


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Bank Robbery

In May of this year, Rose graduated from college with a Bachelor’s in Business Administration. She was flying high: she had her degree, she had started her own business, a nail salon, which was close to running a profit, she liked living in San Jose with her boyfriend. Life was good, and she was taking a vacation with her parents to celebrate her achievements.

The first thing that augured a problem was pretty innocuous: a credit card purchase was declined. These things happen, and Rose didn’t pay too much attention. She was on vacation after all. Next, she got an email that her credit limit was increased to $1900, from $1500, without further explanation. A week or so later, she found out that the Wells Fargo bank account she used for internet purchases was wildly in the red. How could this have happened?

Someone had gotten into Rose’s bank account, which had  $25 in it at the time, and siphoned about $1400 to Western Union, where it becomes essentially untraceable. The bank account is linked to her credit card–the one for which the credit limit was raised. The fraudulent transaction went through, but since the credit limit on her card was insufficient to cover the amount, she ended up maxed out on her credit card and in the red on her bank account.

Rose appealed to Wells Fargo for help, but all they did was slap her with one overdraft fee after another. Everyone she talked to said it was not their fault. They said they would investigate, but only after she had reported the theft to the police and to the FBI. Even so, they didn’t offer her much hope of recovery. She went to the police, to see if they would help her, but they said there was nothing they could do. And the overdraft fees kept coming. She went to the FBI, because the money had crossed state lines, given the involvement of Western Union, they said there was nothing they could do. And the overdraft fees kept coming.

Now Rose had to borrow money to stop the overdraft bleeding. She requested a personal loan, to get back into the black, but the overdraft fees had ruined her credit score and the bank declined to give her the loan. And the overdraft fees kept coming. She tried other banks, but they declined to help her for the same reason. And the overdraft fees kept coming, the overdraft fees kept coming. So Rose tried to get a payday loan, but all they can give you is $400 and by now she needed thousands. She tried crowdfunding to come up with the money, but she didn’t make her goal and came up with zero. And the overdraft fees kept coming.

In more and more desperate straits, Rose turned to her family and asked for help. She had hesitated, because in her community it is embarrassing to owe money, even if it’s not your fault. At first, her family didn’t understand her situation. When they finally did understand, they told her they didn’t have anything to spare. And, remember, all this time, the overdraft fees kept coming. In all, it took about a month for the bank to put her $3000 in the red.

Eventually Rose gave up and turned to an online usury outfit, loanme.com, which offered her a $3100 loan,  took $100 off the top in fees, and then started charging her  an interest rate of 135%.

By now Rose has two jobs. She’s a carrier for Amazon, with irregular hours. She has another part-time job, also with irregular hours. She’s running her nail salon–which generates just enough revenue to allow her to pay her employee. And she’s looking for a better-paying job to be able to pay back that loanme.com loan. She hopes to pay  off that loan before the end of the year, because in January her student loans kick in. So far, she has paid $800 to loanme.com, of which $2.00 went to reduce the principal, meaning she still owes $3098. What if she can’t pay it off before January? “Then I’m screwed,” Rose explains.

So here’s the score:

  • Thief takes about $1400 (illegally, but with impunity).
  • Bank takes something on the order of $3000 (totally legally).
  • Loanme.com takes at least another $3000 or so (legally) if Rose pays off the loan by December. Much more if she can’t (also legally).

They are pretty much indistiguishable, except the legal ones seem to have more leverage.

So what to do? There are a few things:

Any other ideas? Please let us know. We’d love to hear them.


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China’s Social Credit System

Rogier Creemers, at Oxford, has translated a set of draft regulations for China’s new Social Credit System. Creemers is outraged:

But Creemers is convinced Chinese Internet giants like Alibaba, Baidu and Tencent will cooperate with the government in operating the system. These companies are ‘in a symbiotic relationship with the government’, he argues. Wheras in the US companies like Google or Facebook show themselves fighting for the privacy of their clients against the preying eyes of intelligence agencies, in China this is not the case. There is no doubt among key players who is in command. ‘Government and big internet companies in China can exploit ‘Big Data’ together in a way that is unimaginable in the West’, says Creemers.

Perhaps Creemers has forgotten about FICO , which has been using consumer spending habits as a proxy for “good citizenship” since 1956.


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Marshmallows for Grownups

In a recent New York Times article, Shaila Dewan wrote that “Encouraging low-income people to borrow money, and then to get a credit card enabling them to borrow more, may seem counterintuitive or even a little risky.”

It’s not at all counterintuitive if you realize that credit is doled out based on a version of the famous marshmallow test: those disciplined souls who can refrain from using the credit that they have are worthy of more credit. Or: much shall be given to those who have their needs and desires under a tight rein. I recently learned that if you use 15-45% of the credit that you have, your FICO score goes up. Now, some people will be able to game this really easily. You can shut down a credit card if you are low in the “approved range.” You can open another credit card account if you’re a little on the high side. These are just cosmetic changes and can’t have any real bearing on your power to repay any additional debt. All the same, I’m fairly confident that it will turn out to be true that those who have the wherewithal to manage their spending to stay in the credit usage band will turn out to be more financially successful and able to repay debts in the long run. Consider the following reasons:

  1. Their needs and their income are reasonably matched, so they are in a pretty sustainable pattern. (That is, most of them probably don’t have to consider that the marshmallows lying on the table may be the only way to feed their kids today.)
  2. They get really inexpensive credit and so they can buy a house, get a boat, start a business, and so on, without taking scary risks, like poor people with low credit scores have to do.
  3. The probability that a health-related expense will have brought them to their knees is probably also quite a bit lower, as they are more likely to be in jobs with decent health plans attached.  (Perhaps the Affordable Care Act will rejigger the equations a little bit here.)

Given the financial regime we live under, getting poor people to improve their credit rating by showing that they have the discipline to leave the marshmallows on the table makes perfect sense. They probably are a better bet to repay whatever credit they use than the poor devils who are daily trying to figure out which bill they can pay this week and whether they have enough gas to swing by the food pantry.

I suspect that it’s nevertheless highly “counterintuitive” (as per Dewan) because there is something very squirrelly about the ethics of the case. It is cruel to dangle money in front of folks who desperately need it and then reward them for not spending it. It is just another example of levying a surcharge on poor people for being poor. Punishing and further impoverishing the poor doesn’t sound quite right to most of us, even if we are willing to concede that the logic of the financial institutions getting wealthier by this mechanism have a corner on the publicly recognized logic.

I think this is why the vast majority of parents fail to raise their kids by the general principles brought to bear by the financial institutions that rule much of our lives. I have only ever run into one person, an Ethiopian, who had received parental training that prepared him for this reality. His parents gave him an allowance in the same spirit that we receive credit cards–if he spent it, he would be grounded. While this young man thought that he had learned something useful from his frequent punishments, he didn’t think he would raise his own kids that way.

We may bow to the power of the banks in the management of our financial affairs and in our social judgment, but our intuition tells us pretty clearly that setting traps for the most vulnerable among us is no way to treat people.