Ridiculous History - Episode: "Credit Scores are Absolutely Ridiculous"

Released on October 29, 2024 by iHeartPodcasts

Hosts

• Ben Bowlin
• Noel Brown
• Producer: Max Williams

Overview

In this enlightening episode of Ridiculous History, hosts Ben Bowlin and Noel Brown delve deep into the perplexing world of credit scores. Joined by their producer, Max Williams, they unravel the history, mechanics, and societal impacts of credit scoring in America. Labeling credit scores as "absolutely ridiculous," they explore why this numerical system wields such significant influence over everyday financial decisions and personal lives.

Defining Credit Scores (00:00 - 07:37)

Introduction to Credit Scores

• Ben Bowlin opens the discussion by expressing confusion over the complexities of credit scores compared to credit cards.
  • “Like most of America, we were talking off air when we did a history of credit cards... we started saying, hey, you know what's more confusing than the idea of credit cards? It's the idea of credit scores.” [00:00]

Components of Credit Scores

• Noel Brown explains the specialized terminology associated with credit scores, such as hard vs. soft inquiries and the roles of Equifax, TransUnion, and Experian.
  • “The idea of hard versus soft credit inquiries and like the two different reporting agencies...” [01:11]
• They emphasize the pervasive nature of credit scores in major financial decisions like purchasing homes, cars, and obtaining loans.
  • “If you’ve ever interacted with the financial system in the United States, you have run into credit scores...” [02:27]

Impact on Daily Life

• Max Williams shares a personal anecdote highlighting the consequences of not participating in the credit system.
  • “You get punished for not participating in the system.” [02:58]
• Noel Brown touches on the score range and what constitutes a good credit score.
  • “You know, it can go from 0 to I believe around 900...” [07:37]

Historical Evolution of Credit Reporting (07:37 - 37:06)

Early Credit Systems

• Ben Bowlin and Noel Brown recount how credit reporting began in the 1700s United States, relying heavily on personal relationships and reputational "vibes."
  • “In the 1700s United States, if you're a storekeeper and you want to start a business... it was a vibes based system.” [13:07]

Institutionalization and Bias

• The formation of the Mercantile Agency in 1841 marked the shift towards a more standardized, albeit biased, credit reporting system.
  • “They would figure out someone's marital status, their ethnic background...” [19:07]
• The hosts discuss overt racism and anti-Semitism embedded in early credit reports, reinforcing social inequalities.
  • Ben: “Prudence in large transactions with all Jews should be used.” [19:07]
  • Noel: “Another reporter... described a liquor store owner... a low Negro shop.” [19:58]

Modernization and Digitization

• Transitioning to computerization in the 1960s raised privacy concerns and accelerated the monopolization of credit bureaus.
  • Ben Bowlin: “Transferring information from a manual file onto a computer triggers a threat to civil liberties.” [36:51]
• The Fair Credit Reporting Act of 1970 was a pivotal moment, introducing regulations to prevent discrimination and protect consumer data.
  • Noel Brown: “If you go to Credit Karma, you can see... compare their reports...” [43:00]

Current State and Criticisms (37:06 - 56:31)

Consolidation of Credit Bureaus

• Ben Bowlin discusses the reduction from over 2,000 credit bureaus in the 1960s to the current three major players: Experian, TransUnion, and Equifax.
  • “The companies later merged like they do, becoming Dunn and Bradstreet... a real monopoly.” [37:06]

Privacy and Ethical Concerns

• Concerns about privacy violations and the potential misuse of credit data persist, with parallels drawn to modern data mining practices.
  • Max Williams: “This sounds like Facebook to me. Information era, data mining.” [40:28]
• Noel Brown highlights how personal data from credit reports can impact other areas like insurance and utilities.

Social Implications

• The system disproportionately affects poorer Americans, creating a feedback loop that exacerbates financial struggles.
  • Ben Bowlin: “It's expensive to be poor. And then if you have this extra knock on strain added to your household budget, it raises your likelihood of having bankruptcy...” [54:37]
• The hosts stress the importance of understanding credit scores to navigate these systemic issues effectively.

Understanding FICO Scores (56:31 - 58:05)

Breakdown of FICO Score Factors

• Noel Brown and Ben Bowlin provide a detailed explanation of the five key factors that determine a FICO credit score:
  1. Payment History (35%) – Timeliness of payments.
     • Noel: “Anyone could probably think that's probably the most important factor...” [56:31]
  2. Amounts Owed (30%) – Utilization rate of available credit.
     • Ben: “And number two, how much do you owe? That's 30% of your grade here.” [57:15]
  3. Length of Credit History (15%) – Average age of credit accounts.
     • Noel: “Average credit age is five years...” [58:05]
  4. New Credit (10%) – Frequency of new credit inquiries.
     • Ben: “New credit is 10% of your grade...” [59:36]
  5. Credit Mix (10%) – Variety of credit types.
     • Noel: “That's like having a portfolio...” [61:10]

Interplay of Factors

• They discuss how these factors interact in complex ways, sometimes causing contradictory effects on the overall score.
  • Noel Brown: “If you pay off a bunch of stuff, then you're no longer utilizing your credit. That can have a negative impact...” [08:41]

Conclusion: The Dual Nature of Credit Scores (58:05 - End)

Necessary Evil

• While acknowledging its flaws, the hosts agree that the credit score system serves a crucial function in the modern financial landscape by providing a standardized measure for lenders to assess risk.
  • Ben Bowlin: “But as ridiculous as the origins may be, the credit score still fills a modern need.” [55:02]

Call for Awareness and Vigilance

• They urge listeners to stay informed about their credit reports, utilize tools like Credit Karma, and practice good financial habits to mitigate the system's negative impacts.
  • Noel Brown: “They don't agree with each other. It can be tough to interpret and compare their reports...” [39:04]

Final Thoughts

• The episode wraps up with a reflection on how credit scores, despite their problematic origins and operations, have become an entrenched part of American society. The hosts emphasize the importance of understanding and navigating this "ridiculous" system to maintain financial health and equality.

Notable Quotes

• Ben Bowlin: “Credit scores are, absolutely, a weird system…” [02:27]
• Noel Brown: “I can't recommend Credit Karma enough upfront because it does break down a lot of this stuff…” [07:33]
• Ben Bowlin: “The idea of credit scores is surprisingly recent, which is nuts…” [13:07]
• Ben Bowlin: “Prudence in large transactions with all Jews should be used.” [19:07]
• Noel Brown: “Another reporter... described a liquor store owner... a low Negro shop.” [19:58]
• Ben Bowlin: “They don’t agree with each other. It can be tough to interpret and compare their reports...” [39:04]
• Noel Brown: “As ridiculous as the origins may be, the credit score still fills a modern need.” [55:02]
• Noel Brown: “It's expensive to be poor. And then if you have this extra knock on strain added to your household budget, it raises your likelihood of having bankruptcy...” [54:37]

Key Takeaways

1. Historical Roots: Credit scoring originated from informal, biased systems based on personal relationships and "vibes," leading to systemic discrimination.
2. Modernization Issues: The transition to computerized credit reporting increased efficiency but also escalated privacy concerns and consolidated power among major bureaus.
3. Systemic Flaws: Credit scores can perpetuate social inequalities, disproportionately disadvantaging poorer individuals and reinforcing financial hierarchies.
4. Understanding Factors: Awareness of the five key components of FICO scores empowers individuals to manage and improve their credit health strategically.
5. Necessity vs. Fairness: Despite its absurdities and inherent biases, the credit score system remains a fundamental component of the financial ecosystem, necessitating informed usage and potential reforms.

Recommendations for Listeners

• Monitor Your Credit: Regularly check your credit reports through reliable platforms like Credit Karma to stay informed about your financial standing.
• Understand the Factors: Familiarize yourself with the components that influence your credit score to make informed financial decisions.
• Practice Good Financial Habits: Timely payments, maintaining low credit utilization, and diversifying credit types can positively impact your score.
• Advocate for Fair Practices: Stay aware of the systemic issues within the credit scoring system and support initiatives aimed at making it more equitable.

Final Thoughts

Ridiculous History masterfully combines historical analysis with contemporary critique, offering listeners a comprehensive understanding of credit scores' origins, evolution, and enduring impact on American society. By dissecting the "ridiculous" aspects of credit scoring, the episode encourages a more informed and critical engagement with a system that profoundly shapes financial realities.

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