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Feature: A standardized, but imperfect credit system in U.S.

Xinhua, May 30, 2016 Adjust font size:

Keith Bliss, a senior vice president at Cuttone & Co. company, has been holding a credit card since 1987, but he is not that satisfied with the credit system in the United States.

"There was one time, we just missed the bill in the mail, and that showed up on my credit report, that's a delinquency for just 15 dollars," he said.

Bliss was applying for an auto loan then. He told Xinhua that he had to argue very hard with the person extending him the loan, "because he wanted to charge me higher interest rate just for that, 15 dollars."

Credit score might be the most important piece of financial information about one person in the United States. It can affect many aspects of a person's life, such as applying for a new credit card, mortgage, or auto loan, as it is used by lenders to determine how creditworthy you are.

Wang Yin is a software engineer in New York. He got his first credit card in 2011, right after he landed his first job. In 2014, when he was planning to buy his first house, he got to know the concept of credit history.

"I found out that if I want to get a loan, I need to get a credit score," Wang added.


The credit score is calculated by observing a person's financial behavior over the years, and is gathered-and handled-by market-based credit reporting agencies.

Right now, there are three major credit reporting agencies in the United States: TransUnion, Equifax, and Experian. These companies use the FICO score to demonstrate the creditworthiness of the borrower. Borrowers with high credit scores tend to get higher loans on mortgages and cars, among others, than those with low credit scores.

There are five factors that can affect a person's credit score: payment history, amount of debt, length of credit history, amount of new credit, and credit mix. The score is calculated irrespective of factors such as the borrower's income, religion, nationality, marriage status, residence, work and so on.

"For example in 2014, when I didn't know much about FICO, and applied for five credit cards and the same time, my score dropped drastically then, to around 550, a very risky degree," Wang said.

He has since managed to make payments on time, and kept his amount of debt as suggested. Now, his FICO score is over 750, an indication of a very dependable borrower.

A borrower's FICO score is used in 90 percent of lending decisions, according to the consumer division of the company. Since the score is developed over time; it drives the borrowers to pay attention to their financial behavior.

"What a consumer credit report shows is you propensity to pay, your payment history and obligations, it also shows whether you have been sued over debt or filed for bankruptcy," said Chi Chi Wu, staff attorney at National Consumer Law Center, or NCLC. Her specialties include fair credit report and credit cards.

The U.S. credit report system covers over 200 million adults across the country, and it has run for decades.

Overall, consumers are not complaining on a large scale, said Stuart Pratt, president and CEO of Consumer Data Industry Association. He said a 2010-11 credit report accuracy study found that among 1,000 consumers surveyed, 95 percent of consumers were satisfied with the dispute settlement, and over 95 percent were satisfied with the result.


For all the standardization and convenience, though, the system still has it deficiencies.

For one thing, it ignores the income of the borrower, as government, financial agencies and merchants all encourage consumption. It is highly possible that a person with 3,000 U.S. dollar monthly income can get a total credit of over 10,000 dollars.

"It was also responsible for the huge growth in consumer credit in the U.S.. There are people with 16 credit cards with credit lines ten times of their incomes. You just have to pay the minimum, not the entire thing. Before the financial crash, there were a lot of people who were heavily indebted," she said.

Also, if the borrower couldn't pay the debt, he can declare bankruptcy. In that scenario, the banks have no better solution than just admitting their bad debt and putting their assets for auction.

For another, although there are three leading agencies in the United States, making the market somewhat competitive, oligopoly is still one concern.

In fact in the 1970s, there used to be 2,700 small local credit bureaus all over the United States, mostly not computerized, said Wu. Over the years, the three withstood the vicissitudes and become the major ones.

"You cannot pick and choose from the three agencies. For many years they are not responsive to consumers' complaints, such as the inaccuracy of the data and the disputes regarding their reports," said Wu.

"Basically these agencies didn't really care, because their customers are the creditors and the debt collectors that buy the report and supply the information," she added.

"It's imperfect," said Bliss, the VP who used to be a credit manager at Citibank. "They are very objective, and they don't take into account things may happen to a person's life."

"They should make allowances," said Bliss, by observing his own experience and past network with his customers.

"I wish the scoring system has the ability to easily have someone like me to call off some nonsense late payments," he added. Endit