American Credit System Is Far From Perfect, What Can Be Done About It?

"Build good credit!" is something that we as adults often hear. You may have also heard of the importance of credit scores and have seen people who go to great lengths to maintain a good credit score. While the credit score is important, it is not important in the way that you may think. So, first up, let's understand what a credit score is. 

The numbers are records that can demonstrate to the future lender how good are you when it comes to repayment. "Usually your credit score will be displayed as a three-digit number and the higher your score, the more likely you are to be accepted when you apply for credit, like a credit card or a loan, as well as a mortgage or mobile phone contract, said Maxine McCreadie, a personal finance expert at UK Debt Expert.

Now, the credit scoring system in the United States has often been criticized for being vague. Most people in the country, do not understand how the score is determined. The system is truly arbitrary and there has been no clear explanation as to how the scores are set. 

For starters, many people do realize that their number is capricious, like, your credit score can go down after you pay off a loan, and go up if you use a lot of credit cards and pay the bills continually, as long as you're not missing a payment. Critics have often said that the system is very difficult to navigate and the three bureaus that currently rule the American credit system are too powerful.

According to reports, credit and consumer reporting systems made up more than half the complaints of all the Consumer Financial Protection Bureau cases received back in 2020. 

"Credit is the lifeblood of the economy and critical for families," said Aaron Klein, a senior fellow in economic studies at the Brookings Institution, but under the current setup, "we rely on an outdated and inaccurate system of credit scores."

In the country, 90% of lenders use FICO scores when deciding whether to give out loans or not. However, most people don't have a single FICO score. FICO scores which are normally calculated using data from credit reports that are given by the three major credit bureaus: Equifax, Experian, and TransUnion, have often been called out for containing errors. Back in 2013, an FTC study found that one in every five consumers had errors on at least one of the three reports. 

“The credit bureaus are not incentivized for accuracy, they’re incentivized for volume and speed,” Klein said. "As long as the errors are symmetric, in the aggregate, their data will still be right. [But] there’s going to be a group of people who are getting harmed and a group of people who are benefiting," via The Verge. Over time, many experts have pointed out the flaws that exist in the system and proposed ways to tame it.

Experts also urged the government to solve the discrimination that exists in the system. “People of color and women have not been afforded the same opportunities to access reputation and relationships to be able to shift that into investment and lending capital," said Rodney Foxworth, CEO of Common Future.