Are Credit Scores Fair?

"I know very well why authorized users are included, and I believe they should," Paperno said, "but one of the unintended consequences is someone with absolutely no credit experience can have a score well into the 700s, while somebody who works for a living, pays their own rent every month, pays their utilities, uses cash and doesn’t owe anyone a dime doesn’t have a score."

That can certainly seem unfair, but keep in mind that being an authorized user isn't a fast track to amazing credit, either. We all start with nothing and have to find a way in.

"If you've never had a loan, [lenders] don't know how you are at managing a loan," said Nessa Feddis, senior vice president at the American Bankers Association. "What a credit score reflects is how a person has managed credit in the past and how they’re likely to manage it in the future."

Think of it this way: Being an authorized user can be a bit like having your learner's permit. It takes a lot of time to get to the point where you're allowed to drive on your own, and even then you'll have some restrictions. Similarly, you can't expect to get credit if you haven't met the minimum requirements set by the industry.

"How do you give somebody a license if they haven’t passed the test?" Feddis said. "You’re not going to give somebody a car who’s never driven a car."

Carrying the Weight of Bad Credit

It’s understandable that people with credit histories dotted with risky behavior are going to have low credit scores, because decades of data says those people are more likely to miss payments than those with pristine credit reports. Presumably, good behavior will allow you to move away from past mistakes and improve your credit score over time.

But is it really that easy? A report from the National Consumer Law Center indicates that people with credit problems may be at a competitive disadvantage when it comes to building their credit.

Consider this analogy: You've been instructed to run a mile in less than eight minutes. You fail, and now you have to run it again, until you reach your goal. It was hard the first time, but now you're tired, making it that much harder. Essentially, your failure perpetuates itself, and while success is not impossible, it's becoming increasingly difficult to achieve, because you're struggling to shake the fatigue that came from past failures.

To put this in credit terms, imagine that you lose your job and can't pay your mortgage; your credit will tank. Consequently, you may have trouble qualifying for loans or credit cards, and if you do qualify, you're going to pay a lot more in interest than someone with good credit. That burden of high-cost loans could make it difficult to pay your bills, which may then be sent to collections. A collections account adds another hit to your credit score, so you continue to grapple with diminished access to credit and high interest rates.

"That’s when we get to the issue of if there’s a vicious cycle effect," said Chi Chi Wu, an attorney at the National Consumer Law Center. She used the example of people who lose their jobs due to economic decline and end up in foreclosure on their homes. "They might be required to pay more for insurance, they might be denied rental housing or even employment based on negative information on their credit reports."

Wu acknowledges it’s an imperfect system, but it used to be worse for consumers before lenders used credit scores.

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