Living in the Land of No Second Chances: Bad Credit is Far Too Expensive

Participating in society has a prerequisite —?one you can’t control and have very little insight into — a good credit score. It’s required to rent an apartment, buy a house, finance a car, and get a good rate on car insurance. In some states, you’ll need it even to get a job. Hoping to get a little credit to smooth out life’s financial shocks? That’ll be extremely expensive, unless you have good credit. Need to move into a nursing home long term? Most require a credit check.?

It’s hard to quantify the cost of bad credit as its impact is so wide-ranging. How can one begin to calculate the cumulative cost of everything crucial being more expensive? Take just one facet of life: renting an apartment. Many landlords will not rent to tenants with poor credit or to anyone with anything less than excellent credit, no matter their payment history or their income. A tidal wave of consequences extends from this: where you live, the rent you pay, the quality of your housing, the location, distance and travel times to work and school… the list goes on.?

Bad credit shouldn’t carry such a high cost: a downward spiral that is practically irreversible.?

Credit scores aren’t the most accurate or telling.

Credit scores do more harm than good and are often treated like an immutable fact about a person, as something as simple, accurate, and useful as their blood type. Not only are they harmful, they’re often erroneous: 30% of credit reports have errors, errors that are extremely time-consuming to correct, as Latasha Williams’ experience exemplifies. Williams had her identity stolen in 2020, and though she was working with the credit bureaus to correct her report, in the intervening months she was unable to rent an apartment. Her solution? Move to another town where she didn’t know anyone, but was able to win a housing lottery. We hope we’re not the only ones who think we people shouldn’t have to move towns simply because they had their identity stolen.?

As this profile of Taqwanna Clark in The New York Times details, it’s possible to contest —?and have removed — items from your credit report. After years of sending hand-written letters to the bureaus, she was able to get some of the negative items on her report deleted. But it still wasn’t enough to lift her score and qualify for a fixed-rate mortgage on a $150,000 home in Houston.

After 7 years, some negative reports are required to fall off the credit report thanks to the Fair Credit Reporting Act of 1970. Others stay for ten years. But, not everything. If a person has a judgment against them, that’ll stay on the report for 7 years, or until the statute of limitations is reached, whichever is longer. Federal Perkins student loans remain on the credit report until they’re fully paid. And, even if some deleterious things fall off the report, the bureaus don’t delete that data. “There are certain instances where they will report it,” according to the Consumer Financial Protection Bureau. “These time limits on reporting negative information do not apply if the credit report will be used in connection with: Your application for a job that pays more than $75,000 a year [or] Your application for more than $150,000 worth of credit or life insurance.”

Similarly, eviction filings on background checks never disappear —?even if the eviction was a no-fault eviction such as the landlord desiring to sell the property uninhabited. The New York Times piece “The Stigma of the Scarlet E” details the punitive and enduring nature of these requirements. When lawmakers pushed to seal pandemic-era eviction records, landlords pushed back, arguing, “No, we won’t take it off their record. We want people to know they are a bad tenant.” What’s noticeable to us at Sawa is that there’s an air of retribution in credit reporting and scoring.?

It seems we live in the land of no second chances. Thankfully, there are better alternatives.?

We’ve written before about ways we can improve the credit scoring system we have today, and the downsides of letting high-cost predatory credit be the only option for millions. Our take is that we have the opportunity to transform the financial future of entire communities for generations —?and we believe we should create that change.??

Certainly, secured credit cards are a way to put positive credit activity onto your report. It’s not a bad thing, but alone it’s not enough. We believe that consistent savings activity should also count, and that what happened in a person’s life seven years ago — be it a divorce, or a lost job, an illness, or a pandemic — isn’t indicative of their ability to pay this year.?

Regular bank or transaction data can be used to make much more refined assessments of credit worthiness.

The Pew Charitable Trusts found that just a few months of history of a person’s routine deposits and payments “generally provides enough information to underwrite small loans without any staff time or the need for external data.” This is particularly important to making credit more equitable; using credit scores often results in denials of credit for “Black, immigrant, and prospective borrowers under age 30,” while account history offers real-time and more accurate information about a person’s ability and likelihood to repay.?

Globally, we’re seeing mobile payment data used in this way to expand credit assessment capabilities and extend credit to un- and under-banked households and very small businesses. Take MYBank in China, for example. MYBank approves clients who are for the most part completely blocked from traditional banking channels — no collateral, no accessible history, too small to be profitable, etc. —?at four times the rate of traditional lenders. Yet, their default rate is extremely low. It works because they use the ecommerce and mobile payments data in Alibaba and Alipay to calculate risk. Of course, this also needs thoughtful regulation, but the additional data on the transaction level makes it possible to outperform traditional credit scoring because that additional data approximates the local knowledge of the type local banks used to have.?

At Sawa , we have a similar capacity —?we can consider the credit worthiness of our members through the lens of their participation in their Sawa pod. For example, a member who has completed multiple rounds of the Sawa Savings Wheel has demonstrated their character and capacity. We’re motivated by our belief that making available the safe and reliable financial services that people want and need can transform the wealth trajectory for generations.?

What if there’s a better way to assess credit risk??

What if we tapped the power of community as a way to demonstrate our actual character and capacity? What if we believed people and their financial circumstances had the capacity to change? What if we even created those changes intentionally? At Sawa, this is exactly what we’re doing — our members are not alone and they’re not walking credit scores.?