If you’re an adult in these here United States, you probably have a credit score.
And you’ve probably been told, maybe more than once, to live your life in such a way
that will improve that strange number that lies somewhere between 300 and 850.
“Build good credit,” you are told, and financial success will follow.
The higher your credit score, the happier and more secure you will be.
That is not a wholly irrational belief.
Credit scores have a pervasive, though often invisible, set of impacts on our lives.
They are EVERYWHERE today: they’re often REQUIRED for renting an apartment, for getting
a mortgage, for taking out a loan, even for getting a job.
But for a number so important, it is REMARKABLY arbitrary.
You’ve probably experienced just how [fingers] capricious and downright weird your credit
score can be.
Pay off a loan—do the “responsible thing”—and your credit score may go [pause] DOWN, not
up.
But maintain multiple credit cards, use them frequently, and continually pay installment
loans, your credit score is likely to INCREASE—as long as you never miss a payment.
It is a very strange system.
Believe it or not, it wasn’t always like this.
This peculiar practice where a “score” is so powerful in determining so many aspects
of your life wasn’t always around.
In fact, credit scores—also known as FICO scores, after the company that created them—weren’t
used to determine loan pricing until 1989.
That’s not that long ago.
How did it get this way?
How did we get to a point where this funny little number exerts so much power over our
lives?
To understand, we’ll have to go back a bit, to a time called the 1970s.
It was the age of bell-bottom jeans and disco and Gerald Ford god bless him and Dog Day
Afternoon.
Dog Day Afternoon!
Not just Al Pacino but John Cazale AND Charles Durning.
At-ti-ca!
Love that movie.
But the 1970s was also a time when American industry was getting rapidly automated and
outsourced, and a lot of people who had previously made a pretty good living began to lose out.
Throughout the 70s, and going into the 80s, 90s, and 2000s, industries like steel production
or auto manufacturing rapidly shed their workers, and places like Youngstown or Flint or Warren,
that’s my dad’s hometown, were left without [slow down] a whole lot of support.
Manufacturing fell from more than 30 percent of total employment in 1955 to 22 percent
in 1975, and less than 19 percent by 1985.
By 2005, it had fallen to [slow it down] just barely above 10 percent.
For the most part, these high-wage industrial jobs with good pensions and benefits were
replaced by jobs in the growing “service sector.”
A lot of people in our great national industrial belt wound up working at places like Walmart
or McDonald’s, which provided no benefits or pension and wages a lot lower than what
people were previously making.
At the same time as this [professor voice] process of deindustrialization was unfolding,
a new philosophy was on the rise in government.
It was an attitude that prioritized austerity and deregulation—an approach that was called
“NEOLIBERALISM.”
As the masses of unemployed or underemployed workers grew into a “surplus population”
on the margins of the economy, political elites slashed welfare programs while deregulating
the industries like banking.
And in 1978, the Supreme Court prevented states from enforcing laws capping interest rates
for nationally chartered banks, gutting anti-usury protections for lenders.
So the ‘70s saw two important trends: first, deindustrialization and falling living standards
in much of the United States; and second, the deregulation of banking and lending.
In the 1980s, these two trends collided.
You see, with a new glut of households that were dependent on low-wage, no-benefit jobs,
people could no longer survive just on their incomes as they might have been able to before.
So they had to turn to the exciting new world of consumer credit, and debt became a bigger
and bigger part of working-class life.
This led to what the scholar Susanne Soederberg calls “DEBTFARE”—consumer debt as a
SUBSTITUTE for good jobs and good wages and a social safety net.
Of course, debt has been around for a very long time, and was already widely used in
the U.S. to finance big purchases like cars, or college.
But as wages collapsed and welfare programs were cut, MORE and MORE families were forced
to go deeply into debt JUST TO STAY AFLOAT.
The cold, hard reality was that people just couldn’t live on what they earned, and were
constantly on a treadmill of debt in order to provide for their family.
In the 1980s, banks learned how to take advantage of this situation.
Before, the credit cards they offered were a loss leader for them.
But then they realized something important.
The way to make money was NOT to target people who were well-off and could pay off their
debt.
It was to target people who were NOT well-off, who were reliant on debt and couldn’t pay
it all off at once.
As one banker said in an interview – and I quote – “it didn’t require a lot of
investigation to see that the people who paid [their debt] in full every month were not
profitable.”
Banks called these customers [hands] “REVOLVERS” — people who took on the maximal amount
of debt they could without defaulting, and who could be charged higher interest rates
as a result.
Overwhelmingly, of course, these “revolvers” were living paycheck to paycheck, who needed
debt in order to get by in the harsh new economy.
They became the target – really, the prey – for an explosion in consumer lending,
with the plastic credit card at its center.
The banks pitched it as a matter of freedom and flexibility.
But for the downwardly-mobile people they were targeting, it was about necessity.
This massive expansion of consumer lending is where the credit score came in.
You see, lenders had long employed ways to discern how “creditworthy” their applicants
were, with arbitrary judgements of whether they were “shifty” or “of good character.”
But as corporations amassed huge reams of information on customers and their behavior,
they now had enough computerized information for them to COOK UP algorithms about who was
and was not “creditworthy.”
So in 1975, the first FICO score was developed.
But the banks weren’t so interested in “trustworthy” or “creditworthy” lenders.
They wanted those “revolvers,” the people who would make them as much money as possible.
And when the first general-purpose FICO score came out in 1989, that’s what it was designed
around.
Which is why, in 1995, the director of consumer policy at Experian—one of the biggest credit
rating agencies—admitted: “Modeling just credit risk is passé.…[The real risk is]
that a customer is not profitable.”
They were searching for what one banking publication called “DEBT-PRONE CONSUMERS,” and systematically
targeting working-class people who now needed debt in order to survive—and who could be
charged higher interest rates as a result.
So starting in the 1980s, lending to the poor—so-called “subprime” or “nonprime” lending—grew
rapidly.
The “riskier” the borrowers were, the more interest they could be charged, and the
more money the bank could make.
That’s why at Wells Fargo, one of the biggest banks in America, loan officers were incentivized
for YEARS to aggressively market subprime loans to Black communities, even for people
who qualified for “prime” loans at lower interest rates.
These victims were the “profitable customers” the banks were looking for.
Wells Fargo called these “GHETTO LOANS,” and loan officers referred to the individuals
they were trapping in debt as “mud people.”
The goal, of course, was never to help them; it was to MAKE MONEY off them through predatory
lending.
The credit score became a crucial part of this.
It is a tool of discipline that makes you into the ideal customer for the banks.
That’s why credit scores don’t reflect actual financial health—things like the
difference between your income and your spending, or how much money you’ve saved.
What they DO reflect is YOU being a reliable, juicy profit source for THEM.
They’re not looking for trustworthy borrowers, but people who can be counted on to live in
debt.
Because keeping you in debt means PROFIT.
Your credit score rewards you NOT for making decisions that actually help you financially,
but for taking on the maximum amount of debt that you can possibly repay.
In an economy as unequal and predatory as ours, credit scores may be “necessary”
in the narrow sense of what our system demands.
But credit scores, and the entire system of debt that lies underneath them, are not a
fact of nature, or eternal like the thespian artistry of Al Pacino.
Credit scores are necessary ONLY in an economy that cannibalizes the sweat and tears of its
working people, that regulates so much of our lives through a number reflecting your
utility to the banking industry.
You can spend your whole life working on that number, and many of you will.
But no matter how high you get it, no matter how many years of work and sacrifice you spend—you
will have ALREADY paid the price.
I’m Chase Madar, wandering law professor, for the Gravel Institute.