The Debt Paradox

Anti-Randroid
Jul 24, 2017 · 11 min read

Like many recent college graduates, I have finally reached the point in life where my student loans have become a major preoccupation. Every step I take now revolves around honoring the financial agreement I made with the government when I decided to pursue Physics. On a personal level, I do think the student loan bubble will burst and shatter the United States’ economy — but that’s an exploration for a later time.

Being a formulaic thinker who worships numbers, my first step in this many-year showdown between debt, income, and myself, was to put all of my loans together in one place. I created one place wherein each separate government loan, interest rate, term limit, and payment due date were visible at a glance. Added to this was my credit card debt as well since applying for grad school in Physics is a horrendously costly affair — another exploitative practice that I’d love to fully explore at a later time as well.

Once all of my debt was visible in one location, I could fuck with the numbers. Interest rate calculations, time calculations — figuring out how fast I could pay it all off, and which method would minimize my repayment in the form of interest. Several hours later, I had a payment plan. It would be financially tough, but I was determined. I made an agreement when I took these loans, and I am a person of my word: I will pay back what I have borrowed. Having created my first long term financial plan, I called my parents — and learned something deeply unsettling:

If I paid off all of my debt, stayed out of further debt, and increased my savings as projected — my credit score would plummet.

What. The. Actual. Fuck.

Wait… But Why?

Why would paying off debt, thus demonstrating responsible practices, be penalized with a credit score reduction? How are credit scores calculated? Why are credit scores even a thing — if they don’t accurately reflect the integrity of the credit holder? What’s the point? I didn’t know. And after a few minutes of cursory research, I discovered that a lot of other people didn’t know either.

Finance is the fucking mystery cult of our times. Curated by elites, fed in disconnected morsels to the masses, and deeply embedded in every aspect of our lives — finance is a behemoth that has mastered the use of the exploitative adage “that’s just the way it is” in order to discourage any positive change imposed from below.

But that shit’s played out.

What’s really going on here? How is it possible that we live in a country that demands its citizens to remain in debt in order to progress in life, and then publicly criticizes excessive debt politically while simultaneously reinforcing the businesses that demand its citizens remain in debt? We’re stuck in this incredibly convoluted vicious cycle because “that’s just the way it is.”

“That’s just the way it is” isn’t good enough anymore. I want to know what’s going on, why it’s happening, and how we can fix this.

The Credit Score:

Back in the early days of credit — before it became the centerpiece of the United States’ economy — credit was acquired by going to a bank and sitting down with an actual human. The credit-seeker (because FUCK calling human beings consumers — it’s dehumanizing) would interact with a banker and plead their case for a loan. Loan = credit, credit = loan. While the bankers may have been the “darkest timeline” versions of humans — they were still actual flesh and blood people. Credit was issued on a case-by-case basis on the subjective decision of a human being (granted, a human being who wanted to maximize their own profits).

This was the 1940s-50s, a notoriously discriminatory era in U.S. history. Predictably, this human-to-human approach to credit was rife with the problems of subjectivity. The loaning of money was inherently discriminatory against people of color, and women — since the gatekeepers of the money were almost uniformly dudes with money.

The tumultuous 1960s brought about a demand for credit to be acquired in more objective fashion. Responding to the financial needs of the time, two statisticians by the name of Bill Fair, and Earl Isaac, developed an object measure of credit-seekers’ likelihood to repay their debts. They began creating predictive models (“predictive analytics”) that took financial histories from the big three credit reporting agencies and spit out a three digit number that predicted how much a risk an individual was to the banks issuing them credit. They took the subjective human out of the equation, replacing them with a simple number. Bill Fair and Earl Isaac created the Fair Isaac Corporation — aka: FICO.

Sounds good, right? No more discrimination based upon how a particular banker was feeling about a particular human on a specific day.

The FICO score became a staple of credit risk assessment in 1989. It’s based on some really complicated mathematics (that are constantly changing) that take into account five major factors:

  • Payment History on Credit (currently: 35%)
  • Current Amount of Debt (currently: 30%)
  • Age of Credit History (currently: 15%)
  • New Credit Requests and Inquiries (currently: 10%)
  • Types of Credit Held (currently: 10%)

But FICO is no longer alone. There are several competing credit score predictive models currently in use, but the biggest competition FICO currently faces is from VantageScore. Both institutions create a credit score based upon different factors from EACH credit reporting agency.

What does this actually mean?

At ANY point in time, you have AT LEAST SIX different credit scores.

Here’s where shit gets really fucked up.

Six Different Credit Scores (minimum):

When you apply for any loan, whether it’s a mortgage loan, a car loan, a credit card, even insurance — the lending institution can choose whichever credit score they’d like to make their “educated decision” on how risky of an investment you are. Because each credit score is different, based upon different factors agreed upon as important by the Credit Reporting Agency (Equifax, Experian, TransUnion) and the Credit Score Calculating Institution (FICO and VantageScore) — some individuals experience wildly divergent numbers based. At one moment, a person could have a credit score range of 100–150.

Why is this important to know?

Because you, yes YOU, don’t get to decide which score is viewed or used in the determination of future loans or credit. A lender can access EVERY score that dictates “who you are” financially, and make a decision based upon which score they trust the most.

The lower your score, the higher these lending institutions can charge in interest payments. So this plethora of scores has provided the lending institutions with a buffet of decisions that ultimately benefit the financial institutions. If your FICO score with TransUnion is 750, but your VantageScore with Equifax is 650 — which do you think the car company is going to select before leasing you a new a vehicle? Which do you think the bank is going to select before issuing you a loan to purchase a house (still lauded as the most important move the middle class can make to create wealth)?

That’s right. All these scores ultimately contribute to one thing: maximizing what you pay to whichever institution you’re attempting to borrow from. If a lending institution sees that your credit score ranges from 650–750, they will choose to base their lending decision based upon the 650 score because they can hike up your interest rates, therefore enhancing their profit on your loan.

This is real life.

You don’t get a decision here. At any given time there are more than 6 different numbers that define you in the financial sector, and you have absolutely no choice in the matter. Moreover, the institutions do not have to tell you beforehand which score they will settle upon. When you apply for a loan, the agency has the right to look at your credit score in order to make a decision, but you do not have the right to know which score they’ll be looking at.

To add insult to injury, in order to actually see all of these numbers that measure who you are as a financial person — you must pay. That’s right. There’s a fucking paywall between you and the number that defines you when you need a car, when you buy a house, when you need insurance, and when you apply for loans to pay for medical treatment.

To me, this sounds like a violation of the confrontation clause in the sixth amendment. If judgment must be passed upon you, you at least have the right to know your accuser. The use of “criminal” in the sixth amendment has thus far protected the financial institutions, but I digress….

When is My Credit Score Actually Required?

Aside from applying for a car loan, a mortgage, and insurance for both? Your credit score is increasingly taken into account when you rent an apartment or home. When you apply for student loans. When you apply for a loan to cover medical expenses. When you apply for medical insurance. When you apply for a loan to start a business. When you apply for a credit card in order to cover an emergency. When you apply for a credit card through a big box retailer –

IMPORTANT!!!!: big box retailers have credit card sales quotas for their employees. If you’re tired of retail associates asking if you want to open a new credit card, please remember that you’re speaking with a human who is making shit money, and is increasingly being hounded by their employers to sell YOU more credit. You can be annoyed, but don’t mistreat the employee because of your annoyance. The employee is just a victim of a predatory for of demonstrating a company’s wealth, and they’re really just trying to not lose their job. Be angry, but be human.

Credit scores are also increasingly becoming a major piece of the employment puzzle. If you’re applying for a job, companies actually do have the right to check your credit report. If you have a less than stellar credit report, and you need a job to pay off your debt — companies can reject your employment based upon your report, thus making it harder for you to pay off your debt — which of course keeps your credit score low. These companies cannot look at your score, and they are only given a truncated version of your credit report as dictated by the Fair Credit Reporting Act — but this is still a major thing.

Employers are increasingly doing a risk analysis of potential employees based upon the credit report of their choosing. 47% of employers check credit reports before making hiring decisions according to a Society for Human Resource Management survey in 2012.

What’s even more fucked up is when you read about employers checking credit reports, EVERY site advocates using a credit monitoring system which is just another financial expense.

Vicious cycle within vicious cycle within vicious cycle.

If you’ve made it this far….

Then you’re probably wondering how this fits in to me and my fucking student loans (or you and your fucking student loans). Thanks for reading, you’re a champ.

This entire system of reports and scores are built upon being in debt.

If you pay off your debt, and strive to live your life in the black rather than relying on money that you actually do not possess, then you become more risky than someone who has defaulted on tons of loans.

Credit scores (as illustrated in FICO’s breakdown above) are based upon how much debt you have, how much existing credit you have, the diversification of said debt, and ratios within each. If you go into debt going to school (only), and you pay off your student loans — you’re fucked for several reasons.

  • You only have one type of debt in your debt history — you’re not diversified [10% of your score, FICO]
  • You have paid off your loan in full and no longer have an ongoing debt cycle (perhaps you paying off $20,000 in student loans was a fluke rather than a demonstration of your fiscal responsibility) [30% of your score, FICO]
  • Likely, the age of your credit history is only the duration of your possession of student loans [15% of your score, FICO]
  • Without ongoing debt, your credit history age doesn’t increase [again, 15% of your score, FICO]
  • No new credit inquiries or requests [10% of your score, FICO]

If you happen to be really fiscally savvy, and you manage to stay out of debt — you are fighting an uphill battle when it comes to following the American Dream script.

Without debt, your score plummets or disappears. With a low (or no) score, you become an enormous financial risk, which means that companies can completely gouge you on interest rates should you ever need to apply for a loan of any kind.

Big Picture:

Why is this even a thing? Why is a history of live in the red a necessity for progress? For wealth creation? For long term financial security?

The short answer is that the United States’ economy cannot survive without debt, so keeping United States citizens IN debt is necessary to keep the economy trucking along in a manner that is detrimental to all but a very select, privileged few. Wages for middle class citizens have declined steadily since the 1970s manufactured oil crisis. Companies are increasingly moving overseas, automating and outsourcing jobs which in turn creates employment scarcity.

Employment scarcity thus perpetuates the decline in earned wages by creating an aura of desperation. Many Americans must take whatever job is offered to them, regardless of the pay. Employment scarcity, and desperation allows employers to offer increasingly lower salaries for more work. Employment scarcity and desperation also conspire to keep workers silent because if you speak out against this predatory behavior, you can be fired and replaced — probably at a lower cost.

At the same time, these companies that are paying their employees less and less (while simultaneously paying higher ups more and more) increasingly produce more products. These companies depend upon these products being purchased in order to survive. If their employees, being paid less and less, are unable to purchase the products on the market — these companies will crumble.

Hence debt. In order for this economy to continue chugging along, people must purchase shit. In order to purchase shit on increasingly lower salaries, people must take out loans and possess credit cards.

In order to keep this predatory system alive, there has to be some sort of incentive for this ultimately destructive behavior: credit reports and credit scores. If you haven’t built up credit, it’s nearly impossible (unless you’re throwing down $20,000 in cash to buy a car) to get anywhere in life. If you haven’t built up credit, you’ll be turned down from renting an apartment or buying a home. If you haven’t built up credit, you’ll be gouged on interest rates on a loan for a car that you probably need to get to work. And if you haven’t built up credit, you could be turned down from even securing a job.

This is madness. Companies in the United States can’t survive if they don’t sell their products, and they continue to lower wages for the people that they depend upon to keep purchasing their products. To fix it, we’ve created an exploitative credit system that rewards people who force themselves into a constant cycle of spending money they don’t have in order to be defined by a fucking number than determines whether or not they’ll be exploited for getting something that they need.

“That’s just the way it is…”

That’s not fucking good enough anymore.


Originally published at antirandroid.com on July 24, 2017.

Anti-Randroid

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“That’s just the way it is” isn’t good enough anymore.

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