Tuesday, December 31, 2019

What Hath Equifax Wrought?

A lot has changed in ten years, with regard to credit reports.

A reader writes that I did not "do the math" on the Equifax data breach claims.   I noted that you can file a claim for up to ten hours of your time at $25 an hour (or $20 an hour, depending on which page of the claim site you read).   I did not infer that you would get this money.  Likely you might get a few dollars, if you are lucky.

The media has been hyping that "no one" will get anything, which is good, as it discourages more people from applying.   The fewer that apply, the greater the payout for those who do.   Over the years, I have gotten small checks from class-action suits - $5 here or $10 there.  Sometimes less than a dollar.  The lawyers usually get more.  This case is a little different in that it was brought by the FTC, but I am sure lawyers are making money somehow in this deal.   We don't work for free.

So you might get a dollar or two from this deal, if you sign up for it.  Or you may get nothing - if you don't sign up.  It takes a few minutes to fill out the form (which auto-fills with the data on your laptop) and if you fill out one claim for every member of the household....  Who knows?

Anyway, this got me to thinking about the credit reporting agencies, and how things have changed over time.  In fact, things like this Equifax breach have resulted in changes in how credit reports are handled and how fees are charged (or no longer charged) for credit report freezes.  Things have improved over time.

When I started this blog, your credit score was considered some tightly held State Secret.  I am not even sure back then you could access this even by paying for it.  The almighty credit score was considered "intellectual property" and how it was calculated, a mystery known only to alchemists.  I recall a lender showing me my credit score back then, with the admonition, "I'm not supposed to show this to you, but...."   Hard to believe back then people were not entitled to see data about themselves!

Since then, the credit score has been whoring around.   Many 3rd parties parsed out how it was calculated, more or less, and thus can "calculate" a credit score that is only a few points away from one of the "official" scores like Fair Issac or FICO as they call it.  Other credit reporting agencies came up with their own scores.  And I think, in the meantime, the importance of credit score has faded.  Some are listed as "for educational use" which is some sort of ruse to get around intellectual property claims, or avoid liability, I guess.  It is funny how they vary by ten points or more.

For educational purposes only!

As I noted before, as a landlord, I was more interested in the credit history than some number calculated on a computer.   Sometimes the best tenants were people who had a troubled credit history (and thus could not rent from the big apartment complexes) but had made efforts to patch things up (usually by marrying someone with a better credit score).   On the other hand, someone with a great credit score could be an utter con-man, although it was rarely the case.  You have to delve into the background of a person's life to really understand them.  Maybe this score number is a way of initially filtering out prospects, but it is a lousy way of making a final evaluation.

Of course, today, credit card companies, banks, and Credit Karma offer to show you your credit scores for free - either the actual scores, or one they calculate - as a bonus service for doing business with them, or as a come-on to advertise credit card offers to you.  They whore the score.

Like I said before, I don't obsess about credit score too much, and trying to "game the system" to increase your score is pretty futile.  Most of these gaming techniques result in moving your score only a few points one way or another.  Others are neat ideas, but hard to implement without a time machine.  For example, I went through my annualcreditreport.com free credit reports (done at four month intervals, as suggested by a reader) and noted a lot of old open accounts that I no longer used, such as a Sears charge account I opened in my 20's to buy a set of tires.

I closed this (and some others) and this affected my "oldest account" part of the scoring - which may have lowered my score by a few points at most.   Later on, I read this "advice" on how to game your score by keeping an older account open.   Great advice, I guess, but if you already closed the account, not of much use.  And if you don't have an older account, not of much use.   And if your credit score is in the trash anyway, and you have an older open account, what's the point?   It isn't like you can benefit from this advice much, and as you can see above, my credit score isn't hurting too badly.

If you pay your bills on time and don't over-borrow, your score - and credit history - will be fine.  You can't "game" your way around several months of late payments, a default, or a bankruptcy.  If you have a score in the low 600's, the only thing you can do is put your financial house in order.  And if you are obsessing about your credit score in order to borrow yet more money, maybe it is time to get off the debt train.

And that is the gist of it - the people who obsess about credit score the most are doing so because they want to borrow yet more money to get a new car or a jet ski, or whatever.   They end up paying the highest interest rates, which eventually causes them to make late payments, default, or go bankrupt, which in turn lowers their credit score further, which means they can borrow only on even worse terms.  Wash. Rinse. Repeat.

There are legitimate ways to "repair" a credit history by removing bad data.  I mentioned before that when Riggs Bank sold my mortgage to Key Bank, some 30 years ago, they reported my mortgage payment as "late" as I had sent the payment to Riggs, which did not forward it to Key Bank for over a month.   Back then, the credit score was a mystery to most folks, and I didn't realize that a late mortgage payment was a major credit score killer.

I called the bank and explained the situation, and they removed the information from my credit reports.   Today, banks usually wait 30 days or more when a mortgage is bought or sold before reporting any late payment information in order to avoid this problem.

In another situation, Mark left his apartment in Florida after graduating from college.  His no-good roommate was supposed to pay the last phone bill (oh, the days of landlines!  Good riddance!) and didn't.   Notices were sent to the apartment, which of course, were not forwarded.   He ended up with a "sent to collection" debt on his report.  Again, a few phone calls and a payment of $59.82 for the final phone bill (and late fees) and the problem was solved.

So you can "fix" some things on your credit report, but no, you don't need to spend $99.99 on a "Credit Repair Kit" or pay a "Credit Repair Service" to do this.   These bogus kits and services are usually worthless or worse than worthless.  One gag going around (not so much lately) was this scam where they claimed they would "negotiate down your debt" for you, and in the meantime, to send your debt payments to them to be kept in escrow until an agreement can be reached.   Of course, your creditors simply refuse to talk to such people, and your credit score suffers from a number of delinquent payment reports.  Eventually they sue you and get a default judgement, and your minor debt problem has blossomed into a major fiasco.   Stop believing in Santa Claus

The only way to avoid this is to get off the debt bandwagon and stop wanting things you can't afford.  Once a person starts living within their means, they stop making late payments (because they have fewer payments to make) and their score will go up over time.   Eventually you won't really need the score, if you get completely out of debt.   But even then, a credit score can be needed to get a job, or even buy a car paying cash.   My last car, I wrote a personal check for, and they weren't about to let me drive it away without figuring out whether I actually existed and had a fixed address and some sort of history.   So I had to unlock my credit report so they could download it.

Sadly, so many people get caught up in this fear and paranoia about credit scores, credit reports, and "identity theft" - the latter of which is cranked to fear level 11 by the media, because it sells eyeballs.  The reality of "identity theft" is that the credit card companies and other reporting agencies are calling any credit card theft (where someone skims your credit card numbers and charges stuff) as "identity theft" whereas ten years ago, this was simple credit card theft.  So this makes the numbers look alarming when they are not.  And no, you are not liable for false charges to your credit card account, provided you notify your bank promptly, which of course you do, because you balance your credit card account daily and pay off the balance daily, right?

Actual cases of "identity theft" do occur - where someone takes out a loan in your name, buys a car in your name, or otherwise tries to impersonate you in order to run up debts in your name or access your accounts.   But in most of these cases, the person performing the theft is someone known to them, often a family member - often a close family member.   It isn't hard for a brother to swipe his sibling's driver's license and then use this (if he has a passing resemblance) to apply for a credit card or put some other debt in his brother's name.   It is very rare (but not impossible) that some total stranger will impersonate you and try to take on debt in your name.

But even then, you are not responsible for that debt, as you did not take it on.    The problem rests with the lender, who gave out a loan to someone without properly vetting them.  Of course, straightening this all out can take a lot of time and energy on your part - and in the short-term it may kill your credit rating.   But if someone buys a house in your name, you don't owe them a free house.

Locking or Freezing your credit report is one way to prevent this problem.   And in the old days, it was kind of a pain-in-the-ass and oftentimes (depending on what State you were in) you had to pay $3 each time you locked or unlocked your credit report, which discouraged people from doing so - by design.   One side-effect of this Equifax nightmare is that these credit reporting agencies are under increased scrutiny and increased pressure to clean up their acts, and thus today you can freeze your credit report for free - and unfreeze it as well.

In fact, a handy thing you can do on some of these sites is to unfreeze your credit report for a limited period of time after which it automatically re-freezes again.  So, for example, you are car shopping or buying a house, you can set your credit report to unfreeze for a day, a week, or a month.   It is handy, and it is about time these credit reporting agencies made it easy for the consumer to access and control their data.

Of course, the reason why they wanted to make it hard to lock the credit report in the first place is that the real customers of the credit reporting agencies (the ones paying to keep the lights on) were the creditors wanting to extend credit offers to consumers.   You are paying for a new battery for your car at Sears, and the clerk helpfully offers to set up a Sears charge account.  With a few clicks, and your social security number, you can be "approved" for a credit card.   All the big-box stores do this now - Home Depot, Lowes, etc.   They all want to sell you "90 days same as cash" and if it is a painless process - like falling off a log - odds are, you will agree to it.   Credit locks and such are a real cock-blocker and party-pooper.   People might actually think about the consequences of debt, if they have to wait more than a few minutes.

So, oddly enough, this Equifax Data Breach may be the best thing that happened to consumers in the last 20 years.   It made people realize that we are handing over a lot of power and control to some private organizations that can make people's lives very difficult, and maybe these organizations need to be held to a higher standard.

It is not too different from how the auto industry has been regulated.   When we built the interstate highway system in the 1950's, we put all our eggs in one basked labeled "automobile transportation".   The automakers made huge profits as a result, as Americans went from one-car-per-family (if that) to one-car-per-person today.   So the automakers can't have any beef with reasonable regulations about safety, emissions, warranties, and so forth.   The same could be said to be true for aviation.

So, oddly enough, we might be better off as a result of this breach.  That, and I might get a check for $2.87 in about eight months.