A photo illustration shows charts for credit scores on a computer in North Vancouver, B.C., on June, 15, 2016.The Canadian Press
Rob Csernyik is a 2022 Michener-Deacon fellow and a contributing columnist for The Globe and Mail.
Several years ago, when applying for a small-business grant, I was asked for a copy of my credit report. My score was poor, but my sheepishness was countered by the fact it was a non-repayable grant and not a loan. Yet during the interview I was hectored about the importance of having a good credit score and intrusive questions about why I didn’t.
In subsequent years, though my own credit score has vastly improved, I have noticed their continuing encroachment on our lives. Credit scores – ratings between 300 and 900 – loom beyond lending decisions, extending to renting property, employment background checks – and even love. The U.S. financial platform Neon Money Club recently launched a limited-time dating app called Score, to connect financially like-minded singles with at least a 675 credit score.
Since the turn of the 1900s, credit bureaus – which sound governmental, yet are for-profit businesses – have aimed to predict financial behaviours and trustworthiness of borrowers. But credit scores today, created by private-sector firms that sell them for profit to creditors, should be consigned to history. It’s an industry that should no longer exist.
I don’t disagree with tracking how people use their credit in some manner. But a free, non-profit government-run system with clear goals and an easy-to-understand scoring system would be better-suited than current credit reporting techniques. It’s not an unheard of idea: in 2019, former U.S. presidential candidate Bernie Sanders floated making such a change.
Recently, the Trudeau government made an announcement that added to credit bureau credibility instead of criticizing the obvious flaws of the industry. Alongside introducing a brand new renters’ bill of rights, his government plans to ensure timely rent payments to be counted toward credit scores. Experts suggest it could benefit renters who nearly qualify for mortgages, and put those already struggling to make rent at a disadvantage. The bureaus, however, will benefit from new opportunities and revenue, despite being one of few areas in our lives where such pronounced corporate opaqueness gets tolerated.
Consider that the algorithms which calculate credit scores are proprietary and largely a mystery to the public. Even standard wisdom is counterintuitive. (Equifax’s website features a blog post titled Why Your Credit Scores May Drop After Paying Off Debt.) If trying to make sense of algorithms wasn’t challenging enough, there’s little standardization of what scores mean either. I’ve seen reports that state average scores in Canada vary from 650 to 762, a spread wide enough that their assessments of creditworthiness fail to be useful.
Even score classifications vary between the market-leading firms in Canada – scores deemed “good” at Equifax can be “poor” at TransUnion. Though scores are supposedly neutral, BIPOC individuals often have significantly lower credit scores than those of the white population, and a swath of the Canadian population is affected by living outside the credit scoring system by lacking enough access to credit products. This creates a two-tiered system of credit haves and have-nots, beyond the score classifications.
Today, credit users are also responsible for monitoring and solving problems with our files. As it stands, individuals can check their scores for free but are upsold monthly subscriptions to credit monitoring plans to ensure they don’t miss any changes. A U.S. Federal Trade Commission study suggests one in five people have erroneous information on their report; Consumer Reports magazine suggests one in three. These can include data from similarly named people appearing on our files, closed accounts listed as open and delinquent – even the alive being marked deceased. Error rates like this are acceptable in few industries, and rightfully create distrust in the credit scoring system. (Imagine driving a car off the lot if there was a 20-per-cent chance the brakes would fail.)
My credit score, for what it’s worth, is now high enough that I could have used the Score app. But other than that arbitrary number my financial discipline and approach to money isn’t significantly different than it was years ago. The improved score is driven by a few accounts which represent a small corner of my financial life. But in exchange for this new esteem in the eyes of banks, landlords and others, I had to take out multiple credit products. Then I had to use them, but not too much. And to make payments on time, but not the entire balance, lest I lose opportunities to show off my newly established creditworthiness – or at least that’s what some online guides suggest.
I look at my score today and feel a sense of futility in understanding it, and what it truly means, more than hoping it will improve my financial life by opening doors to nicer apartments or better credit terms. Given all the confusion, discrimination, error and other ills baked into this industry, we need to stop giving these scores so much credit.