Posts Tagged credit bureau

Legally Libel, How Credit Scores Are the New Debtors Prisons.

Back in the middle ages if a man owed money and couldn’t pay he would either become an indentured servant, which was a nice name for a white slave or cast into debtors prison.

As time went on banks and lenders realized this was bad for business because it created a disincentive to borrow money since one’s freedom was at stake. Debtors prisons were abolished and bankruptcy laws were passed to protect borrowers from imprisonment and harassment by creditors. these laws were designed to create a check and balance on lenders and borrowers to make each side responsible. When creditors risk losing their investment through bankruptcy, it encourages them to make wiser decisions on whom they trust their money. On the flip side bankruptcy made borrowers less responsible by creating a seemingly easy way to escape debt. Credit bureaus were established to keep a record of borrowers payment history to help creditors make sound decisions and instill responsibility on borrowers.

Through the years the balancing mechanism which had existed between creditors and debtors have been lost because creditors devised schemes to take advantage of low credit scores. It became profitable to loan money to risky borrowers because they would still be ahead even if a certain percentage of borrowers defaulted on their loans because they could charge higher interest rates and late penalties. This easy credit seemed to be a boon to consumers and those who previously did not qualify for loans could now buy a car or a home. In reality however, it reintroduced irresponsibility on both sides, and as a result the number bankruptcy filings skyrocketed.

In an attempt to stem the tide Congress passed the Bankruptcy Reform Act in 2005. The idea was to put responsibility back into the equation by making it more difficult for debtors to absolve debt. It was meant to give debtors some protection from abusive lenders but it did not go far enough and it swung the balance squarely on the side of credit card companies and lenders. Like many things Congress does it too followed the law of unintended consequences. In a sense it gave lenders a license to be irresponsible and created an incentive for creditors to engage in risky behavior. It also has made credit card companies and fly by night payday lenders much more aggressive in there tactics to get people into debt and keep them as long as possible. On the surface it seems like a bonanza for them but instead it has created a disaster that has left many lending institutions in ruins and actually increased the number of personal bankruptcies and foreclosures.

Credit bureaus were meant to help creditors and debtors be responsible but they have evolved into two headed hydras that now rival even the IRS in their ability to destroy lives. The public is remarkably complacent about credit reporting agencies because they think it does not effect them as long as they pay their bills on time. However, a person can pay their bills religiously and still have a low score because payment history is only one of the many metrics used to determine a credit score. Some  things that contribute to lower scores are a high debt to income ratio, too many credit inquiries by loaning institutions, and not having enough debt all can negatively effect your credit. There are life events that can effect your score such as a loss of a job, pay cuts, unexpected medical expenses, and since the score is no longer used solely for borrowing and lending money it has far reaching consequences that can effect your employability and your life. It has now become a de facto debtors prison that can keep a person from obtaining housing, getting a job, raises , and promotions. It has created a catch-22 situation where people can never pay off their debts because they can’t get a good paying  job in order pay then down. Since many poor people have low credit scores it makes it increasingly difficult to get out of poverty, keeping them perpetually poor.

Since credit reporting agencies have such an awesome impact on people’s lives it should be expected that they keep accurate and up to date information, but they do not. The burden of keeping their records accurate falls squarely on the consumer who, in the most part, have very little knowledge of how credit agencies work. When credit bureaus make mistakes it is you who are responsible, not them. In situations of identity theft they make it very difficult to repair the damage further victimizing those who are effected. They also make it very difficult for the average person to obtain, understand, and fix the problems they create. One reason errors occur is because they rely mostly on creditors to report negative and positive data in a timely manner. Many creditors simply do not report accurate information, and are more likely to report negative information than positive. Creditors and credit reporting agencies are not held responsible for the errors they make so there no real incentive for them to spend time and money insuring accuracy. They are free to report erroneous, inflammatory, and libelous information to your employers, landlords, government agencies, and lenders without any risk to themselves. Any other entity that worked this way would be open to lawsuits and public outrage. They are one of the few institutions who can legally libel with little or no consequences to them.

It is time for people to wake up and demand real reform to our credit reporting system. We must demand and require creditors and reporting agencies to keep accurate, real time information and hold them responsible for errors. The burden of proof should be on the institutions. It should be modeled after our court system, which is an assumption of innocence until proven guilty. If they cannot prove an item on a report is accurate then it is incumbent on them to strike it from the record or at least flag it for further investigation. They should be held responsible for erroneous information and be held liable for damages with fines, damage awards and punitive damages. They have become so powerful though that even lawmakers are afraid of them so unless people demand change things will never change.


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