For Slate, I wrote about CashCall vs. CFPB, a case where a subprime lending tycoon systematically broke laws of states like Virginia, New York, and North Carolina that make it illegal to charge sky-high interest rates. In most states with anti-usury laws, if you give out an illegal loan, the borrower isn’t obligated to pay any of the loan back: therefore, the Consumer Financial Protection Bureau argued that CashCall should have to refund all the interest it collected to consumers as restitution. CashCall argued it didn’t realize it had broken any laws (lol…), and judges seem to have found this argument persuasive.
For TalkPoverty,a publication of the Center for American Progress, I interviewed subprime debt collectors about their difficult role as intermediaries between Americans in dire financial straights, and the financial institutions posting big profits.
The problem isn’t that Tide Pods are uniquely toxic, or contain chemicals never used before. The problem is that they’re cute. They’re colorful. And they’re small. It’s the good things about Tide Pods that we have to change to make them safer.
What Tide Pods teach us about consumer product safety is that it’s not always the “bad parts” of products that make them risky: products aren’t always risky because of a gear that breaks and causes an accident, faulty wiring, or a toxic ingredient. Tide Pods drove children to the hospital not because they had more bad parts than other detergents, it’s because they had more good parts: they looked better and felt better. A bill put forth in the New York State Assembly would force detergent packets sold to be in “opaque, uniform colors” — unlike the squishy, candy-like, blue-white-and-orange Tide Pods sold today. Seems like a good thing to me: changing the color scheme may make the product less popular, but won’t make the product any less effective.
To help get Americans out of debt, regulators need to force banks to make their financial products less like squishy, colorful candy. We need ugly detergent that is just as good at cleaning clothes but poisons fewer children. We also need financial products that are equally good at helping families navigate a challenging economy but that tap into fewer of our weaknesses and biases.
Despite a handful of useful credit card regulations passed in 2009, too high of a percentage of Americans paychecks still get lost to loan interest and fees. While student loan debt dominates the news cycle, more American families hold credit card debt than any other form of loan: roughly half of all Americans carry an interest-bearing balance on credit cards. Last year, Americans paid more than $104 billion in credit card fees and finance charges: an average of $823 per American family. In the face of unstable and low-paying jobs, credit cards and other consumer lending products can sometimes help families plug goals and pay gaps, but clearly turning over $823 from American paychecks to big banks ultimately makes the problem worse.
Credit limit increases and credit card rewards are two “features” that make credit cards dangerous — and both “features” could be regulated in ways that wouldn’t make it harder for the Americans who actually face short term borrowing needs.
Banks should be required to get the customer’s permission before raising their credit limit.
Imagine you’re on a diet and you’re trying hard to cut back on sweets. Many of us find it hard to turn down the plate of cookies sitting out in the break room, even if we’d be unlikely to go down the block to buy dessert. Similarly, for the many Americans struggling to make ends meet, a high credit limit is an unwanted invitation to take on debt they know will cause stress and heartache. Researchers Scott Schuh from the Federal Reserve Bank of Boston and Scott L. Fulford of Boston College found that for Americans who borrow money on their credit cards “nearly 100% of an increase in credit limits eventually becomes an increase in debts.” There’s a huge psychological difference between applying for a new loan versus using credit that’s already available on a credit card you have. You might not apply for a new loan to go to your cousin’s wedding, even if you’d charge it to an existing card without knowing when you’ll pay it back. Moreover, too many consumers think of the credit limit as the amount banks think they can ‘safely afford’ to borrow.
The U.S. regulatory framework says a high credit limit is a good thing, implying issuers shouldn’t need your permission to raise your credit limit, but a quick scan of Twitter reveals that many consumers feel different when they say things like: “Got an email that my credit limit has been raised and that is so dangerous how do I decline ” If customers had to request credit limit increases they actually wanted, instead issuers raising customer credit limit without customers prior consent, a high unused credit line wouldn’t be looming over so many Americans heads as an unwanted temptation to enter a debt trap. Australia and the United Kingdom are both good case studies here. Australia prohibits banks from raising credit limits except at the customer’s request, and in the United Kingdom, banks can’t raise the credit limits of people who haven’t been able to repay their card balance in full at least once over the last year.
Credit card rewards are another trojan horse. For some consumers of course, the airline miles or cash back is huge boon — there’s no doubt that for Americans who pay their bill in full every month, getting 1% or 2% back on purchases is a nice perk. But Schuh has shown that to cover the cost of these rewards, banks have to charge high “interchange” fees to merchants, which in turn result in higher prices for consumers. Perhaps more importantly, credit card rewards make it even more tempting for people to spend money they don’t have. The European Union and Australia have both capped these credit card processing fees charged to merchants, which effectively eliminated rewards credit cards in those countries. And good riddance. Simpler products with fewer distinct terms make it easier for people to select the lowest cost option: consumers would find it easier to identify the lower-interest-rate cards if they weren’t also benchmarking the value of airline miles. And there’s no reason low-income Americans who don’t qualify for credit cards to begin with should pay higher prices at merchants to allow wealthy Americans with Chase Sapphire Reserve cards can fly first class to Japan.
While payday lenders charge exorbitant rates and fees, the one thing you can say in defense of payday loans is that they are typically used by people who are explicitly conscious of the fact they’re borrowing money, and are aware it’s not going to be cheap. By contrast, credit cards are slippery, intractable instruments in a country where only 38% of jobs pay enough for people to afford a middle class life, and living within your means can be a constant struggle. Occasionally borrowing on a credit card is the right answer for a family: economists Kyle Herkenhoff and Gordon Phillips have found that unemployed Americans with more credit card liquidity are able to extend their job searches by putting bills on their credit card, ending up with higher paying jobs as a result. But many Americans come to find that despite their irregular income or unexpected expenses, using a credit card to smooth things over just makes their budget shortfalls more and more severe as time passes. Ending unsolicited credit limit increases and taking steps to curb credit card rewards wouldn’t limit Americans from accessing credit when they need it — unlike capping credit card interest rates, as Bernie Sanders and Alexandria Ocasio-Cortez have proposed, which would undoubtedly increase how many Americans get declined when they apply for new credit.
By going after some of the seemingly attractive features of credit cards, we can make them less like multicolored detergent pods, and stop the banks from taking Americans to the cleaners.
I just finished my road trip. The goal was to learn about the impact that credit cards and payday loans have in Americans’ lives. I’m now back in Washington, D.C. If you haven’t already read the previous blog posts, here were some of my reflections from Michigan and Missouri.
Now that I’ve interviewed folks in 18 states for this project (well 17 states, plus the District of Columbia which obviously should be a state!), here are themes on my mind.
“Impatience” isn’t the problem
In Sacramento, I talked to Kathryn, a 63-year-old woman with $60,000 in credit card debt, which she’s whittled down from a peak of $80,000.
Kathryn worked as a nurse for 13 years before becoming a stay-at-home mom in a small town east of St. Paul, Minnesota, near the border with Wisconsin, nearly half an hour from the closest grocery store. Kathryn got divorced right as her youngest kid was starting college. She suddenly found herself alone in a home, surrounded by other people’s stuff: her ex-husband took half the things they’d bought together, and the realtor staged the house with model furniture. Even though the divorce agreement said the full amount of alimony wouldn’t take effect until the house sold, she went ahead and moved into an apartment anyway—it was too depressing to stay in the empty home—without realizing how long it would take to sell the house. The Great Recession was deepening. She racked up credit card debt between attorney’s fees, her car payment, and paying rent while she waited for the full amount of alimony to kick in.
At the same time, she still wanted to help put her three kids through college, and continued to send them cash despite being deeply under water. In writing about credit card debt, economists Scott Schuh and Scott Fulford have said that “more than half the population must be very impatient and care little about risk to hold the amount of revolving debt we observe.” Of course, that framework doesn’t really square with putting your children’s well-being ahead of your own, an act that is deeply future-oriented. More broadly, the schema of “I could have one marshmallow today or two marshmallows tomorrow” is only rarely appropriate for the actual types of trade-offs families are making when it comes to debt.
One additional reflection on marshmallows from this trip:
Vegan marshmallows will definitely melt in your car
Wrap those bad boys up!
It’s time for credit cards to have their comeuppance
According to data from the 2018 Federal Reserve Survey of Household Economics and Decision Making, 91 million Americans have unpaid credit card debt. While 96 million adults said they paid their credit card bill in full every month, a larger number, 106 million, said they carried an unpaid balance at least once over the last 12 months. More than half of those — 54 million — said they had unpaid credit card debt most or all of the time.
Despite the fact that credit card debt is still a central challenge in people’s lives, student loans have sucked all the air out of the room when it comes to talking about debt. It’s easy for people with student loan debt to contextualize the problem as basically a societal one: the byproduct of higher tuition and broken promises. And, of course, the fact that people signed on the dotted line when they were just 18 years old makes it relative easy for them to feel angry instead of embarrassed. By contrast, people deeply internalize the shame of being in credit card debt. I talked to a woman in Seattle who had just moved from Michigan looking for work. “Credit score hinders everything [….] it was tight to get things established,” she said. At the same time, she added, “It’s the individual that gets themself in debt.” At least two Democratic front-runners have proposed cancelling most student loan debt, while proposing to wipe out credit card debt would be more or less unfathomable in our current political climate. Student loan debtors are depicted as sympathetic and credit card debtors are depicted as irresponsible.
Geography matters
On this trip, I talked to people moving from basically every part of the country to basically every part of the country without having a job lined up in advance — in some cases people who literally were moving to and from opposite places.
There’s a lot of places where it’s taken as given you won’t get ahead unless you jump ship. Explaining why his daughter had racked up so much credit card debt, Curtis, a veteran and artist in Council Bluffs, Iowa, said, “She had the best opportunities […] She majored in arts education and she wanted to teach art. She didn’t want to relocate, and if you don’t want to relocate you’re a done deal.”
But there are definitely no set rules for how you’re supposed to go about relocating to make ends meet, when big cities have high costs of living, and smaller towns have few jobs. The lists of “best places to live in America” would be pretty useless to anyone actually figuring out where to go: the variables that actually matter are probably things like the unemployment rate, the median income for people without a college degree, the 40th percentile of prices for a studio apartment, and whether or not the state expanded Medicaid.
I’m still especially interested in the “Ability to Pay” doctrine. In 2010, Congress passed legislation saying credit card company couldn’t issue consumers a credit line unless they could demonstrate the customer could pay the loan back at their current income. More recently, the Consumer Financial Protection Bureau has been going back and forth on implementing rules that would do the same thing for payday loans: effectively outlawing lending money to people who are unemployed. The logic is clear: it can cause outsize harm to lend someone money if you have no idea whether they can repay you, especially because it normally means that you’re charging such high fees that you can break even, even if the customer defaults. And yet, what does it mean for literal mobility in this country if it’s illegal to lend someone enough money to buy a Greyhound ticket and stay at a hostel until they line something up?
What’s next
I’ll be continuing research for this project, and I’m still hoping to talk to more people with experiences with credit card debt, personal loan debt and payday loan debt. If that’s you or someone you know, please drop me a line. I’m moving more into the manuscript phase of this project. It’s been exciting over the last few days to be making progress every day in telling Americans’ stories. I’ll be writing some standalone pieces this fall, as well, and potentially doing some consulting work, at a much lower number of hours than this past spring.
Here are some of the topics I’ve been thinking about outside of my major debt project:
Wage theft: I’m increasingly fascinated both by all the scams employers use to avoid paying people, and why some states/cities refuse to create a climate that would hold employers accountable– when even the most ‘free-marketeers’ among us agree that people should get paid the amount they’re owed for work.
The consequences of natural disasters for households: I’ve been talking to people in the Houston area about how Hurricane Harvey impacted their personal finances. I’m especially interested in the phenomenon of people using their disaster relief to pay off student loans while foreclosing on their homes. I’m also interested in efforts across the country to ensure fair labor standards when we rebuild after natural disasters.
The Community Reinvestment Act: What affirmative obligations should be placed on banks? When this legislation was written, the phenomenon of “they’ll take my deposits but won’t lend to me” was a common critique, especially for minority families: now, it seems like predatory lending is rampant and people can no longer count on getting a free checking account.
Housing crises in rural areas: I talked to people in Red Oak, Iowa, about how areas of concentrated poverty sprung up after FEMA redrew their flood maps. I’m interested in the forces that create housing affordability challenges outside of places like New York and San Francisco.
I’m now on Day 13 on my road trip at my aunt and uncle’s farm in Blue Earth County, Minnesota — today is the first day of the planting season for corn. It’s getting a late start because of all the rain. My next stop will be in Iowa.
If there’s one comment that has come up in most of my interviews with the people who wished they hadn’t borrowed money on a credit card, it’s that they used the card for things they realized they “didn’t really need.” That word “really” hints at the notion that there is actually a lot of ambiguous space in between want and need.
Peggy in St. Charles, Missouri started borrowing money on a credit card when she was pregnant to buy a new mattress — carrying around another person inside made it too hard to get in and out of her old water bed. Tasha in Milwaukee had “known” not to borrow money on a credit card for non-essentials. However, at times, she’d semi-consciously use up the money in her checking account on the things she wanted so that she’d have no choice but to borrow money on her credit card for the things she needed. It was a mental trick she used to let her evade her own rules of thumb.
One of the greatest sources of ambiguity between “want” and “need” is family and tradition. All over the world, people who have been scraping by have found ways to set aside cash to celebrate weddings and to give their loved ones dignified funerals, whether that would mean working 14-hour days or by forgoing more quotidian “needs” like putting plumbing in their house. You can look at these choices as the actions either of status-obsessed people bowing to social pressure, or a recognition of the fact that our relationships to our families and communities are the greatest source of meaning and purpose that most of us have.
In one of the interviews I did before this trip, Joe in Washington, D.C., told me he wished he had forgone getting into credit card debt to buy new clothes, but that he’d never regretted borrowing money to buy last-minute plane tickets to see his long-distance girlfriend when she was feeling down. And similarly, when Kathryn thought about the credit card debt she’d accrued attending her sister’s and best friend’s weddings while in grad school, she said that while she now felt like she was “stuck in peanut butter” financially, it was hard for her to imagine not having stood beside the people closest to her.
Of course, throwing children in the mix complicates things further. I’ve talked to so many people who will figure out how to make things work and accumulate some savings on shoestring budgets when they’re only looking out for themselves. Yet, when it comes to their children, they have a hard time saying no. Is buying a uniform so your kids can join a sports team a want or a need? What about spending the $10 so they’re not the only one in their class left out of a field trip? Parents want so badly to provide for their children not only a sense of security, but also of normalcy, and of the magic of childhood — perhaps explaining why Federal Reserve data indicates that Americans accumulate an extra $19 billion of credit card debt in the fourth quarter of each year (around Christmas) compared to the rest of the year.
I’ll never forget one interview I did many years ago with a woman in Boston who’d accumulated most of her credit card debt bailing her kids out when they’d gotten into trouble — replacing a car they’d wrecked, or floating them when they couldn’t find work. She said that all her life she’d tried to make responsible choices, but that now she had no idea if or when she’d be able to retire (she was in her 60s). “I couldn’t bear to say no to my kids if I was able to afford it — but, in hindsight, the fact that I got into debt means that I never was able to afford it all along.”*
One of the ways that credit cards can mess with our heads is that it’s so easy to think of our credit limits as an “asset” or a “resource” that we can draw down. That way of thinking is so dangerous! Obviously a credit limit has a literal meaning — the amount we can charge on that particular credit card todayif we want to — but attributing any further meaning to that number gets so many people in trouble. The credit limit isn’t necessarily how much credit we could easily get access to. Many people with even below-average credit scores could get more in days or weeks by applying for credit limit increases with their existing cards, or by applying for new credit cards or loans. And the credit limits are certainly not how much money we could afford to pay back. By having available credit on her credit cards, it felt to the woman in Boston that she was able to say ‘yes’ to her adult children. She probably wouldn’t have felt that way if saying ‘yes’ to them had meant applying for a new loan.
In the words of Alexandria Ocasio-Cortez, we need to reject a society that tells people, “If you choose to have any expense beyond mere animalistic survival – an iced coffee, a cab after an 18 hour shift on your feet – you deserve suffering, eviction, or skipped medicine.”
At the same time, the personal finance advice that tells people to be careful about spending money on things they want but can’t afford today, because it could lead to suffering, eviction, or skipped medicine tomorrow, is true! Borrowing money for wants today usually means forgoing money for wants and/or needs tomorrow, and sadly, borrowing money for needs today can mean forgoing even more dire needs tomorrow.
When I worked in the credit card industry on developing the policies for credit limit increases, I would often zoom in to the level of individual borrowers to see what the proposed policy would have meant for them. Especially if a new rule would mean we were giving out credit to fewer people, I would see what that decision would mean in terms of purchases a given impacted customer would have to forgo. Often you see purchases that are pretty basic: $30 on groceries or gas, a few hundred dollars at a Mr. Tire. Other purchases are obviously discretionary: a Carnival cruise, fireworks, iTunes. Many others it would be impossible to say from the outside — spending at Walmart might be electronics or groceries, or at Lowe’s you might be fixing a broken window or replacing something that just looks dated. It might even be impossible to say from the inside!
Unsolicited or “automatic” credit limit increases to existing customers are a major part of how banks and credit card companies give out credit, and in turn, how Americans end up in debt. Just the other day, I talked to one of my cousins whose first credit card gave him a $500 limit, a limit which is now over $10,000. That trajectory is extremely common.
Banks could and should stop granting “automatic” credit limit increases to customers who are still paying interest on discretionary purchases they made months ago — they shouldn’t be trying to profit off of financial decisions that are going to cause Americans to struggle. This idea isn’t about looking at people and judging them in a moral sense – saying “shame on you, you shouldn’t have bought that iced coffee.” It’s about not pushing people into holes they’re going to struggle to get out of. Operationally, I can say with great certainty that implementing this type of proposal at a bank would be no more complicated than all the things banks do on a quarterly basis to increase profits. And compared to Bernie Sanders and Alexandria Ocasio-Cortez’s proposal to cap credit card interest rates at 15 percent, this change would similarly prevent a massive proportion of the high interest credit card debt that causes people to struggle, without having as large of an impact the access to credit that so many people rely on to make ends meet when there’s so safety net in place (like when people put their cancer medications on their credit cards while they’re arguing with their insurance companies to reimburse them.) The interventions in banking that make sense to implement today, in our current world, where people have few places to turn when things go wrong, are very different than the interventions in banking that would make sense to implement in a country with universal healthcare and basic income.
Of course, the idea that banks should stop raising credit limits of people who are still paying interest on past discretionary purchases would be fairly difficult to write into law: it’s more the type of thing a credit union or bank could choose to do on to better serve their customers, and hence, not something we should be expecting when it means they’d be forgoing big profits. One NerdWallet study reported that 86% of Americans with credit card debt regret it. If it was their primary goal, I have no doubt banks could find ways to do many fewer loans at terms or in circumstances where the borrower would ultimately feel regret, while barely making a dent in credit access under the terms and in the circumstances where the loans helped people succeed. To hear those proposals, keep reading in the weeks and months ahead.
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* Just a quick comment that this particular quote is a paraphrase, unlike all other quotes that appear on this blog. This conversation was before I started the research for this project, and hence, unlike all the interviews I’ve conducted over the last 9 months, I don’t have a recording and/or time-of notes.
This painted house is part of the Heidelberg Project in Detroit, MI.
I’m now on Day 9 in the Twin Cities, by way of Milwaukee, Springfield, St. Louis, South Bend, Chicago, and Cleveland, but this story will talk about Day 2, Detroit.
My first stop was the Heidelberg Project, an art installation where Tyree Guyton has used a city block to reflect on time, hope, and community. Guyton grew up on Heidelberg Street, and returned to it as an adult to find vacant lots and a neighborhood where poverty is deepening.
Detroit is a city whose population is only 40% of what is was at its peak. There is no way you can drive around Detroit, at least the neighborhoods where I visited and stayed east of I-75, and confuse it with most other parts of the country. Obviously, every city in our country has people struggling to get by, and neighborhoods that don’t get their fair share of the investment, the roads, the sidewalks, or the playgrounds they deserve from their city government.
But the physical landscape of Detroit was different from anything I’ve seen before. When a city shrinks by as much as Detroit did, you face a nearly impossible challenge: how do you keep up all the roads, the sewers, the water lines, the sidewalks that you once had, provide schools, police and firefighters to all the neighborhoods? You can’t, at least not well.
The Heidelberg Project is interesting for a lot of reasons, one of which is that the project was possible specifically because of the abandonment of that block. It is an opportunity that came out of the challenges Detroit faces, and I saw that thread everywhere I went: a proliferation of seemingly fly-by-night galleries, theaters, street art that leveraged the empty space.
To me, opportunity is one part the chance toachieve stability and one part the chance to express creativity. When we talk about the shrinking middle class, like Dan Kaufman and Latoya Ruby Frazier’s great piece about the closure of the GM plant in Youngstown, Ohio, we mostly talk about how economic changes have made it harder for people to achieve stability: the conditions you need to raise a family, in a house where you won’t get evicted, at a job where you are treated with dignity, with a little bit of money left over to celebrate birthdays and weddings and to give your kids the chance to see the ocean. But opportunity is also about the chance to make art, to invent things, to start a community organization or a business. While those things are never easy to do if you’re hungry, there are ways in which a kid born in Detroit might have more of those chances than a kid born in Washington, D.C., where the amount of money you would need to scrape up to do anything that requires physical space is daunting even for the privileged. I don’t want to glorify or gloss over the challenges Detroit has faced. And yet, it is undoubtedly the case that people have found possibilities in Detroit’s unique landscape.
Lending, of course, is all about opportunity — at its best, it expands possibilities for people.
Joseph Campau Ave in Hamtramck, Michigan, a town inlaid within Detroit’s borders. Hamtramck has been in the news recently for being the first U.S. town with a majority Muslim city council.
When I asked David, a 47-year old man in the community of Hamtramck, whether he thought banks made it too easy for people to get into debt, or too hard for people to access credit, he didn’t hesitate before saying it was too hard for people to get credit.
The last loan David applied for was as a younger man — he was trying to pull together the money to rent a place to live, and his loan application was declined. I asked him how he thought his life would be different today if he had been approved.
“I might’ve had a house […] I might’ve been with my first baby’s mama. I might’ve not had felonies on my arrest record. A lot of things could have happened [for me].”
Of course, if he had gotten the loan and then had trouble repaying it there would have been a different set of negative repercussions — a lower credit score, the possibility of eviction from the apartment, or future garnished paychecks, although, in his case, it’s hard to imagine that would have been any worse than the counterfactual.
Working in lending for as many years as I did, the idea of people like David is always in the back of your head. This loan is only profitable at a 29% interest rate. My models say this person will accrue tons of late fees on top of that high interest rate, and there’s a 1 in 3 chance they’ll eventually default on the loan, tanking their credit score — hurting their chances at finding housing or a job. Do I lend to them? If everyone’s story was like David’s, the answer would always be yes. David is the case for doing subprime lending, even at disturbingly high interest rates, because it’s hard to anticipate all the ways that saying ‘yes’ when someone has come to you asking for your help could change that person’s life.
I’ve asked the question, “Do you think banks make it too easy for people to get into debt, or too hard for people to get credit?” to a lot of people in a lot of places, and Detroit was a place where most people felt strongly that the answer was the latter.
Of course, not everyone’s story is like David’s — interviews I’ve done sincein St. Charles, Missouri, and South Bend, Indiana have made that clear.
I stayed at Hamtramck Hotel and Hostel, which had a mix of travelers, long-term Detroit residents, and people coming through looking for work. Reportedly, at least one person has lived at the Hamtramck Hotel and Hostel for 50 years. I talked to a man who had come from Greenville, South Carolina, a growing city about two hours west of my hometown of Charlotte, hoping that Detroit would offer both a job and cheaper rent.His strategy is probably the inverse of what a lot of people have tried — according to American Community Service numbers, about 40% more people have moved from Detroit to Greenville than from Greenville to Detroit in the last several years.
But there’s no single roadmap for how to get by in America, and we’re all relying on our own sources and accumulated knowledge. Sociologist Beth Redbird has found that when a profession becomes licensed, more people enter it, specifically because it creates a “clear path” to join and gain credibility — a fact that makes me think about how often the specific keys to getting money and making money are shared only locally, between parents and children or between people of similar backgrounds.
I’ll be in Minnesota and Iowa for a while, before getting to Omaha on May 16th.
Since 1882, the United States has denied immigration visas to those who were deemed “unable to take care of himself or herself without becoming a public charge.” This principle has applied also to the renewal of visas of those already legally living and working in the United States, and in some cases, resulting in the deportation of people whose visas were otherwise still valid.
For the past twenty years, while nearly all undocumented immigrants and many legally-documented immigrants have been ineligible for a range of public benefits, the only people labeled as “public charges” were those who got more than half of their income from cash-based public benefits.
Trump’s Department of Homeland Security wants to redefine who counts as a “public charge:” substantially lowering the threshold for how much assistance is considered unreasonable, beginning to include a much wider range of programs like food stamps and tax credits in the calculation. They also want to start factoring in a bunch of personal data like your family size and credit score to “guess” who might become a public charge in the future. In their Notice of Proposed Rulemaking, DHS recommends that U.S. Citizenship and Immigration Services “consider an alien’s liabilities and information of such liabilities in a U.S. credit report and score as part of the financial status factor,” claiming that “a lower credit score or negative credit history in the United States may indicate that a person’s financial status is weak and that he or she may not be self-sufficient.”
There have been a number of illuminatingarticles on what the change in the public charge definition would mean for families who are forced to trade off between making sure their family has food and medicine against the risk of deportation for having sought government assistance. Of course, these changes are in the broader context of the obvious moral problems with “kicking out” families who are doing the best they can. There’s also the practical consideration that a short-term reliance on a de minimis amount on public benefits doesn’t mean a person won’t over the long-term contribute positively to the federal budget.
Beyond all these problems, there’s also some more specific problems with using somebody’s credit score to determine whether to renew their visa, and those problems haven’t gotten a lot of attention.
Relying on proprietary, third-party algorithms
You’ve probably heard of “FICO,” the most popular credit score. FICO uses the information found on the credit reports maintained by the private credit bureaus Equifax, Experian, and Transunion to calculate a score intended to predict your likelihood of repaying debts. While a credit report is a list of (not always accurate) pieces of information about you, like your amount of outstanding debt and your payment history on your loans, credit scores are substantially less transparent. While anyone living in the United States has a right to check their credit report once per year for free from each of the three major credit reporting agencies — Equifax, Experian and Transunion — along with the many additional smaller credit reporting agencies, there is no corresponding right to see your credit scores.
Not only that, the formula used to calculate your FICO and other credit scores are secret — when lenders, landlords, employers, or the credit bureaus Equifax, Experian or Transunion want to see or use your FICO credit score, they have to pay the FICO Corporation.
While lenders rely on credit scores like FICO because they are correlated with a borrower’s likelihood of repaying debts, the statistical relationships aren’t causal: having a higher or lower credit score doesn’t mean that a person has been more or less financially responsible. A person with more unused credit available to them will receive a higher score than a person with less unused credit available to them, even if the two people have made identical payments on an identical amount of debt. Similarly, a person with 10 years of credit history will receive a higher score than a person with 2 years of credit history, even if both people have always paid all their bills on time.
When we make decisions that are so massively consequential to families’ lives based on algorithms that are kept secret from the public, it raises a number of risks. To start, it raises the fairness issues when there are variables being used in the algorithm that are either irrelevant to the decision at hand, or worse, variables that are discriminatory or biased. Importantly, a piece of information that is fair to use in one decision may be unfair to consider in an unrelated decision — for example, most people would consider it appropriate to use someone’s SAT score to decide who gets a college scholarship, but not in deciding someone’s criminal sentence. The variables that are legitimate to include in credit scoring models aren’t necessarily the same variables that are legitimate in making immigration decisions — and when the models aren’t open to the public, nobody is able to protest or raise issues when that occurs.
The lack of transparency around credit scores makes the situation ripe for scams from those who falsely claim they have the hidden keys to the ‘secret kingdom.’ Immigrants and non-immigrants alike are already targeted by ‘credit repair companies’ that make fraudulent claims about their ability to raise a consumer’s credit score.
Ripple effects of deporting the highly indebted
Failing to renew an immigrant’s visa based on their credit score would be a massive hardship for her and her family, but it would have broader consequences for the economy as well.
Having a high amount of debt can result in a low credit score, even if all debt payments are being made on time — meaning that relying on credit scores in making immigration decisions could result in deportation of those carrying high amounts of debt, even if the person is a model community member in every way.
And who carries significant debt? For starters, entrepreneurs. 71% of small businesses carry debt, and 3 out of 4 times, that debt is $25,000 or more. Larger businesses may qualify for loans that are entirely based on the firm’s credit-worthiness rather than the owner’s, but loans to brand-new companies will typically require a personal guarantee from the owner, and be reported to the owner’s personal credit report. Contrary to the rhetoric around immigrants as ‘job takers,’ they are especially likely to be job-makers, starting new businesses at a higher rate than their U.S. born peers. Small businesses built by immigrants employ 14% of all private-sector workers in the United States.
54% of dry-cleaning businesses and 53% of gas stations are immigrant-owned. Image courtesy of Laurie Avocado, Creative Commons.
Suddenly, we’re not just considering the impacts of using the credit score on the immigrant and her family — now it touches her employees and customers. There’s another stakeholder who has a huge vested interest as well: the lender.
Whether the immigrant borrowed money for a business, for education, a car repair or a medical emergency, the lender will want to see the debt repaid — and the odds of that happening drop considerably if the the borrower gets deported. An immigrant forced to leave the United States is likely to see a big drop in her earnings, and hence, her capacity to repay debts. And even if she still has the money to repay the debt, will she have an incentive to? It’s much easier to walk away from a loan if you’re outside the jurisdiction of the U.S. court system, and if you don’t have a reason to try to keep your U.S. credit scores high. This is obviously disadvantageous to the lender, and would have the strongest impact for credit unions and local banks that focus on serving immigrant communities. Fair lending laws prohibit banks from discriminating based on national origin, but that doesn’t mean that credit access for immigrants wouldn’t start to dry up if lenders realize that the very act of extending an immigrant credit could get that immigrant kicked out of the United States down the road.
What comes next
The broader set of changes around the ‘public charge’ determination will be more consequential than the specific language around using credit scores to determine visa renewal. Given President Trump’s disturbing and inaccurate rhetoric about immigrants, a policy that is punitive towards immigrant families may be exactly his intent, even if such a change causes harm to U.S. citizens as well.
That having been said, complex legislation and rule-making often comes with “typos” — ambiguities or inaccuracies that didn’t match the intent of the framers.
A simple modification of the proposed rule to consider specifically “debts that are in a delinquent or defaulted status as reflected in an alien’s credit history” in lieu of “the alien’s credit history and credit score” wouldn’t impede the stated albeit already problematic goal of the rule change, “to ensure that those seeking to enter and remain in the United States either temporarily or permanently can support themselves financially and will not be reliant on public benefits,” but would be fairer, more transparent, and have fewer negative consequences for broader communities.
