Today I read a post about how America’s Credit System is Broken. In essence, the writer thought that he had a good credit score because he had no defaults, no debt, and no credit cards. When he finally decided to apply for a credit card, he was rejected. The writer presents this as some horrible injustice. The fact is that he does not understand how credit scores work and makes a very common mistake. Credit scores are not some global conspiracy. Banks are not required to loan you money. If you want to borrow money, then you have to participate in the credit markets.
A credit score is a number that predicts your risk of future default based on past behavior. Like anything that is used to predict the future, it is imperfect. The writer’s problem is that he chose not to participate in the credit markets, therefore his credit score prevented him from getting the credit card that he wanted. He argues that “There was a big part of me that wanted to continue my protest of the financial system that demands you borrow money and go into debt (even if only a month at a time) to participate.” That’s just ignorant. Get a credit card, put a small balance on it each month, then pay the balance off in full. You won’t pay interest, but you will build a credit history. You are not required to go into debt, you are required to participate.
The writer further extends his argument to argue about the plight of the unbanked. The unbanked are people who do not have a bank account; and so, they use more expensive alternatives like check cashing services and pre-paid debit cards. The writer lards on the ignorance, saying “Beyond that, if someone who is unbanked tries to return to the traditional banking industry, he or she will probably encounter far more obstacles than I’ve run into. It could become impossible, shutting these people out of the entire traditional lending industry and all that comes with it.”
Having a bank account and having access to lending products are two different things. Many of the unbanked cannot get bank accounts because they are chronic check bouncers who still owe banks money for their overdrafts. I am a debtors’ lawyer, but I am tired of these arguments about the injustices of the overdraft system. The bank customer must own up to a minimum amount of responsibility. The systems for clearing deposits and clearing withdrawals is not shrouded in mystery. The problem is that many people fail to balance their bank accounts or fail to budget so that they are writing checks against deposits that have actually cleared.
If you have a bank account, then you have an agreement with the bank. Part of that agreement is to pay a fee when you overdraw your account. If you overdraw your account because you thought a deposit had cleared, that is your fault. It is not the bank’s fault. All it takes is a phone call to determine your available balance. If you don’t understand how deposits clear the bank or you aren’t sure of your available balance and a check bounces, that’s on you. In fact, the bank is often going to extend you credit in the form of covering the check.
You are often better off having the bank charge the overdraft fee than you are having the bank return the check. For example, if you bounce your rent check, you could be evicted. If you bounce any check, you could be criminally prosecuted, sued, or both. If someone has too many overdrafts, fails to cover the overdraft, or fails to pay the fee, then the bank can close the account; and, other banks will refuse to give you an account until you pay the charges on your old account, because they reasonably believe that if you overdrew one account, then you’ll overdraw another account.
A bank is not required to take a client, especially if that client has a history of overdrawing their account. It’s not discrimination or animus towards the working class. Similarly, a bank that does take a client is not required to give that client a line of credit simply because the client says they’re a good credit risk. Apparently, the writer believes that he has the right to demand credit terms from a bank. What he has learned is that if you do not have a recent credit history, then you seem like more of a risk to lenders and you cannot get a loan. Now he has to go about building his credit.
I may seem like I’m being hard on this guy. I call him ignorant a few times. But he’s acting like he’s very financially savvy, and yet he doesn’t know that having a credit card that you payoff each month is basic credit building advice. The writer has decided to take his ignorance of basic credit building and turn it into an indictment of the injustices of the lending industry and the credit reporting system. It’s not. The fact is that unless you have a credit history, you cannot get credit. If you are concerned about building credit or rebuilding your credit, then you have to start out with a low limit secured credit card, just like everyone else. You need to use it each month and pay it off each month. Within 6 months to a year, your credit score will have gone up and you will qualify for a much better credit card.