Tag Archives: credit scores

Health And Debt

I was fascinated by a recent column in which Paul Krugman examined the geographical clustering of low credit scores.

Krugman was deconstructing some recent research showing what he described as a “big band of credit-score calamity that stretches across the American South.” The research confirmed that, in virtually every part of the South and across all demographic groups– every race, every income bracket —  credit score are low.

Low credit scores penalize people in a number of ways. As Krugman notes,

The region’s poor credit means Southerners are paying more to borrow money, assuming they can qualify for loans at all. That sets them back in everything from car and home purchases to credit card rewards.

But why the South?

Many of us would suggest the influence of racism. But that turns out not to explain the phenomenon.

Our first guess about what might be happening here involves race. Almost 3 out of every 5 Black Americans live in the South, and they make up almost 20 percent of the region’s population. Centuries of slavery, sharecropping, apartheid and exclusion from many elite educational institutions left some Southern Black folks with little credit and even less collateral.

When researchers ran the numbers, the Blackest parts of the South had roughly the same credit scores as the least-Black areas. And their scores were far lower than places with similar Black populations outside the South. So while race may play a role, it’s clearly not a defining factor.

Well, what about poverty? The South has the highest poverty, lowest income and lowest education rates of any region in the U.S., and counties with lower income and lower college graduation rates are likely to have lower credit scores.

Nope.

Even some of the South’s biggest, most dynamic cities — think Atlanta or Dallas — have the same below-average credit scores as their more rural Southern neighbors. Within every income bracket, the typical Southerner has a lower credit score than someone who lives in the Northeast, Midwest or West.

So–if it isn’t racism and it isn’t poverty, what explains this phenomenon?

The answer, it turns out, is America’s refusal to follow virtually every other modern nation and offer national health care. Medical debt is the reason credit scores are so low in the South.

It turns out the South has the highest levels of medical debt in the country.

Of the 100 counties with the highest share of adults struggling to pay their medical debt, 92 are in the South, and the other eight are in neighboring Oklahoma and Missouri, according to credit data from the Urban Institute. (On the other side, 82 of the 100 counties with the least pervasive medical-debt problems are in the Midwest, with 45 in Minnesota alone.)

And sure enough, when you look at areas across the nation where adults are struggling to pay down medical debt, they have similar credit scores.

This raises an obvious question: why is this problem concentrated in the South?

One answer is that the South is simply less healthy than any other region. Data from the Centers for Medicare and Medicaid Services shows that among Medicare recipients, the population for which we have the best data, those in the South are substantially more likely to suffer from four or more chronic conditions. And poor health tends to go hand in hand with people having overdue medical debt and poor credit scores.

Poor health isn’t the only factor–Red State policy choices are a huge contributor.A recent analysis in the Journal of the American Medical Association found that medical debt “became more concentrated in lower-income communities in states that did not expand Medicaid. The share of residents with overdue medical debt is more strongly linked to a county’s credit score than any other factor– including debt related to car loans, credit cards and student loans.

Last year, the federal Consumer Financial Protection Bureau (CFPB) issued a scathing report finding that medical debt is “an unexpected, unwanted, and financially devastating expense” that is “far less reliable and predictive of people’s ability to pay their bills” than other kinds of borrowing.

The lack of national health insurance–or even Medicaid availability–means that folks in the South pay higher rates on mortgages and car loans, and have more trouble getting credit.

But there are social as well as individual costs involved.

Insecurity fosters anti-social behaviors. When a serious illness means you might lose your house or go bankrupt—you tend to take those worries out on others. Research shows that countries with better social safety nets are more tolerant of differences in race, religion and sexual orientation, and some studies have suggested that Canada’s lower rate of gun violence can be attributed to their stronger social safety net.

But national health insurance would be “socialist” and Southerners wouldn’t want that…

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Credit Where Credit Is Due

One of the unfortunate effects of our corrupt and paralyzed political structure is the “drowning out” effect, sometimes described as Washington “sucking the oxygen out of the room.” While our attention is fixated on the more dramatic consequences of our national government’s “brokenness,” we fail to notice the harms being done by the multitude of problems that government is simply not fixing.

One of those is the way creditworthiness is measured.

There’s no doubt that credit card companies charge excessive rates of interest. But as scholars at the Brookings Institution point out, simply legislating a cap would actually compound the problem.

When does the interest rate a lender charges cross the line from economically justified to immoral? Societies have struggled with this question since biblical times. Last week, Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) took a crack at this puzzle, proposing to cap credit card interest rates at 15 percent. They’re concerned that the U.S. credit system traps working families with unsustainable debt. We share their concern, but their proposal uses a blunt instrument to attack a nuanced problem.

The Loan Shark Prevention Act, as the new legislation is called, is likely to hurt the people it’s designed to help, driving the market away from consumers with low credit scores. Some people may have their interest rates reduced, but many would no longer have access to credit at any price. Banks have been clever in figuring out how to hide credit in fees, as anyone who has paid $35 for an overdraft knows.

Instead, the authors propose making affordable credit accessible to a much larger group, by fixing what they identify as “the flawed scoring system that allocates credit.”

Our current system decides who gets credit and at what price using algorithms that analyze a person’s credit history and calculate a credit score. FICO, the most common credit score, employs a range between 300 and 850. There is no universally accepted definition of what constitutes a prime or subprime credit score but, generally, people with scores above about 680 are rewarded with cheap credit and high borrowing limits. Those classified as either near-prime or subprime, whose scores largely fall below 680, have a tougher time accessing and paying for credit.

The apparent objectivity of the algorithm masks a whole host of issues. A peek behind the credit-scoring curtain reveals that, as in “The Wizard of Oz,” there are humans feeding imperfect information into the machine. You could be the most creditworthy person on the planet, but if you lack a credit history, are a young adult or a recent immigrant, or had financial hardship in the past five years, your score will be low. Credit reports are rife with errors: One out of 5 Americans has a material error on their score.

I recently encountered this precise circumstance with my granddaughter-in-law: she is young and had virtually no credit history. It wasn’t bad credit, it was no credit, because she had been prudent and avoided debt. No credit became a real problem when she and my grandson applied for a mortgage. (Even more maddening, one of the three reporting agencies kept telling the bank her credit was “frozen”–whatever that means–but continued to insist to her, during her multiple calls to correct the issue, that it wasn’t.)

The Brookings scholars write that “Congress should start examining this system and aggressively pushing for its improvement.”

Lawmakers should push for credit-scoring formulas that take a wider range of data into consideration. Paying a mortgage on time improves your credit score, but paying your rent on time does not, because mortgages are tracked and rents generally are not. That’s just not fair…

The Consumer Financial Protection Bureau estimates that 45 million Americans lack the data that credit bureaus use to create a credit score. If you don’t have a score, it can be very hard to get a loan, rent an apartment or persuade an employer to hire you. Credit scores have become an essential component of what Princeton sociologist Frederick Wherry calls “financial citizenship” — the ingredients necessary to participate fully in the economy and civil society.

If we had a functioning Congress, this is one of the multiple tasks to which they should attend. But of course, we don’t. Right now, Mitch McConnell (aka the most evil man in America) is preventing the Senate from even considering one hundred bills that have been passed by the House.

We have a legislature that is incapable of doing anything, and an Administration trying its best to undo what was accomplished in the past. We aren’t even a banana republic: we’re a failed state.

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