How Did Credit Scores Become So Powerful? Episode 20 of The Deep Dive

Award winning journalist Emily Baron Cadloff breaks down the fundamentals of credit scores and the power of the credit system.

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The music for this episode is a licensed version of “This Podcast Theme” by InPlus Music. Additional music are licensed versions of “Stay Cool” by Loops Lab, “Podcast Intro” by InPlus Music, “Impact Prelude,” and “Inspired,” by Kevin MacLeod.

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TRANSCRIPT:

YASMIN: Welcome to The Deep Dive, a weekly podcast that takes a deeper look into the happenings at The Walrus. I’m Yasmin Duale. On this week’s episode,

EMILY: There’s a very, very common idea that whenever you check your credit score, it drops like just the act of checking the score will actually affect the score. Not true. In Canada, you can check your credit score without penalty whenever you want. But the fact that these misconceptions were so common is what points to a bigger problem of people just really not understanding the credit system. So that’s when we started really looking into what this story was gonna be about.

SIMRAN: Credit scores are often the deciding factor for people’s most major financial milestones, whether it’s getting approved for mortgage, buying a car, or getting a loan for really anything. These three digits have a way of making or breaking a person’s life. But what might surprise you is that finding errors in your credit score is extremely common and trying to fix it. Well, that brings a whole other set of issues.

YASMIN: Today. We’ll hear from award-winning journalist, Emily Baron Cadloff who wrote the cover story for the June issue of The Walrus, her peace explorers, how even the best credit scores can take a plunge on how the rating systems became as powerful as they are today.

SIMRAN: I chatted with Cadloff off about why she chose to write about this topic and find out if there are truly any solutions to resolving credit errors that can have long term effects on people’s lives.

YASMIN: Let’s take a listen to your interview with Cadloff.

SIMRAN: Credit cards are something that most adults and even young adults have and use often what led you to write about this complicated piece of plastic that everyone has in their wallet?

EMILY: Okay So credit cards are like the tip of the iceberg when it comes to credit scores and credit reporting, but it’s also like our, most of us are first introduction to credit scores. And so I was actually first introduced to this topic by my wonderful editor at the walrus Carmen. He messaged me one day, we were sort of chatting and, and he messaged me and said, Hey, what do you know about credit scores? And I thought for a second and I went, um, nothing, I know nothing about credit scores and then he said, yeah, exactly. So from there I started looking into credit scores and I was really fascinated by the myths, the misconceptions around credit scores there, I found a bunch of them. There’s the idea that your credit score is tied to your salary. So if you make more money, you would have a higher credit score.

That’s not true. Uh, there’s an idea that if you get married then you share a credit score with your spouse. Like one, you, you know, it becomes one credit score, also not true. There’s a very, very common idea that whenever you check your credit score, it drops like just the act of checking. The score will actually affect the score. Not true in Canada. You can check your credit score without penalty whenever you want. But the fact that these misconceptions were so common is what points to a vigour problem of people just really not understanding the credit system. So that’s when we started really looking into what this story was gonna be about. And it came down to trying to answer three questions. What is a credit score? How does it work? Why does it have such a huge influence on so many aspects of our lives?

And, uh, and then I spent the next six months trying to answer those questions. this is the bullet point answer. So what is a credit score? A credit score is basically a measure of trust that a lender has in a borrower. So if you’re trying to borrow money from a bank, they will look at your credit score. A high score means that the bank will probably see you as a safe bet, as someone who is going to pay back the loan on time, how does a credit score work? Okay. Bank example, you’re gonna take out your loan and the bank is going to record all of that data. When you took it out, how much the loan is for they’re gonna send all of that information to a credit bureau who calculates everything in Canada, we have two major credit bureaus, and then each time you make a payment on that loan, each time you pay your credit card, or you pay a line of credit, the bank will also take that data and send that to the credit bureau.

So the credit bureau is the one who calculates all of this data, compiles it, and then they spit out a score. And that is what impacts the bank for your next loan. Okay, so then the biggest question, why does it have such a big influence over so many parts of our lives? And that is a really complicated answer. The simplest response is that credit bureaus made sure that they had influence over our lives from the time that credit bureaus were formed decades ago, their goal was to be really seamlessly woven into the fabric of commerce. They wanted to be the most authoritative, the most trustworthy source of information. And then they were, they, they found their way into that position now because of the trustworthiness and the authority that they have really enjoyed for decades, the actual process of what gets calculated and why is really not well known, the credit bureaus are pretty secretive with how they calculate your credit score. Part of that is because it’s proprietary information and they don’t want their competitors to know what they’re doing. Part of that is because the algorithms and the systems that they use to calculate scores change frequently, they change based on the inputs and data that the credit bureaus are getting. So as our commercial society gets larger and gets more complicated, there are more inputs. There’s more data that credit bureaus have to keep track of, and that can lead to problems.

SIMRAN: Credit scores really do have a way of making or breaking a person’s life. How do we determine what a good or bad credit score is?

EMILY: So here’s the thing that is really frustrating. It depends. so depending on what you are applying for that lender might have their own version of what they consider a good score, what they consider a bad score, what they consider an excellent score generally. So the, the scores range from 300 to 900. So generally anything over about 750, and you’re good for pretty much anything that you want. And the thing is, if you’re in that good range, if you’re considered, you know, a, if you have a, a 750 credit score and that’s considered good for say your car loan, it doesn’t matter if it’s 750 or seven 780 you’re in the same range. It doesn’t matter. You’re not gonna get like a slightly better rate on your loan if you’re in that range. But another lender might say a good credit score starts at 725. And another lender might say, actually it starts at 775. It’s hard to say. The other thing that really, um, is surprising, and surprises A lot of people is that the term credit score is misleading. It’s actually credit scores. We all have multiple credit scores. And that’s because firstly, there are two credit bureaus in, in Canada. So they have different algorithms and different things that they use. Different lenders will use different credit bureaus, they’ll work with different credit bureaus, but here’s the big thing. And this is how it made sense to me. Your credit score is calculated with an algorithm, think of it like computer software. So if you have your word processing software and you are using version one and you really like version one, and then the company comes out and they say, Hey, we fixed some bugs. We added some new features. Now you can export to whatever here’s version two, you can choose to upgrade to version two, or you can say, you know what? I really like version one. I’m gonna stay with version one. So the bank that you use, they might use version one and they might love it. And version one, really prioritises people who pay all their loans on time. And they, that part is really important to the bank. They want everybody to pay their loans on time. So they use version one because that calculates the credit scores that they like. But the car dealership across the street, they’re using version two because version two prioritises people who have a lot of credit products and they want people who have a lot of credit products to buy their cars. So they use a version two and then you can go to another place down the street. And it turns out they only use a calculation from the other credit bureau. So that’s like a Mac PC thing. So you could sensibly go to get a loan at a bank, you know, get a cell phone, try to get a car loan on the same day. And you could have three different credit scores reported because we all have multiple scores. So all of that to say, there is no set figure. That is a good credit score because it really truly depends.

SIMRAN: So this leads me to my next question then. Is there truly a way to beat the credit system and avoid errors?

EMILY: You could in theory, um, beat the credit system or being, this is a big theory, but you could in theory, beat the credit system by opting out of it entirely, you could refuse to play the game. You could say, I am going to purchase everything in cash. I’m going to hold onto my money physically. I am, uh, not going to ever buy anything that I do not have the money for today right now, but that’s not actually a realistic or practical way for most people to live because that means that you can never buy anything online. It means that many of the products that now rely on a credit card as a down payment or a deposit are completely out for you. It even means that most banking accounts are no longer up for grabs. So you’re gonna have to get really good at like hiding your money into the mattress or something. So even then though you actually still would have a credit score. It would just be zero. You’d just have a zero credit score. So, I mean, I don’t think that’s really beating the system, but it is opting out. However, like I said, that is a pretty difficult way to live. I don’t think most people would be able to do it instead. The best way to avoid errors is to keep track of all the credit products that you have, what their limits are, making sure that you make regular payments on them. Most adults do have at least one credit card. That’s the most common way that people will build their credit score. But there are a host of other ways, like you said, if you lease a car, if you get a mortgage for a house, if you pay utilities, your electric bill, your power bill, um, if you pay your cell phone bill, these are all inputs that will impact your credit score. So if you consistently pay your bills on time, even if it’s just the minimum amount, great, if you have a bunch of credit products, but they all have some room on them. For instance, you have credit cards, but none of them are maxed out. They all have a little bit of room. That’s good too. You will build that score higher and higher over time. It’s, it’s not a super complicated process, but it does take time.

SIMRAN: Now, when you spoke with the CEO of the First Nations Bank of Canada, you also reported that there are several reasons, an indigenous person is more likely to have a lower credit score. One of them being that they are more likely to experience poverty or have lower incomes. Are there any solutions currently being discussed or implemented at this time to resolve this issue?

EMILY: I’m sure there are many different kinds of like working groups or coalitions or studies out there that are devoted specifically to the issue of poverty within indigenous communities. I’m not necessarily the best person to speak about, uh, all of those on the academic side. But what I can say is that within for instance, say, um, the first nations bank of Canada in speaking with, with Keith Martel, who was the, the CEO, the president, our conversation was really illuminating. Um, as you mentioned, right there, there are higher rates of poverty among indigenous people. The, uh, the poverty Institute of Canada, uh, estimates that the rate is about one in four. So roughly 25% of Aboriginal Métis Inuit people, uh, are living in poverty. So Keith had some really interesting insights into how that can impact your credit score. So, um, like we talked about that sort of cycle before, if you are living in poverty and you have to choose between buying groceries or paying your power bill, what do you do if you, if you choose to buy food and I think many people would, then that means your power bill is late, which could drop your credit score because you’re paying a bill late and that can make it harder to get a loan next time, which makes it harder to pay off those debts, which then can keep you in poverty. Right? So for a group like the First Nations Bank of Canada, knowing this about not just their customers, but their employees, Keith told me that the bank itself actually works with their employees to raise their credit scores. When an employee is brought on, especially in their Northern branches, it’s way more common that a prospective employee might have a low credit score. So the bank will often look, uh, beyond that credit score. So that low credit score might be a deal breaker for other employers. They might not take that, that that person on the bank will often look beyond that. And then once that person has the job, they can offer them at an employee rate, small loans that they can pay back more easily, build their credit score back up. And then that employee not only has built their own credit score back up, but they can act as a sounding board for other people in the community who might also have bad credit. So they can give advice to as someone who was, or maybe still is in the same position. And it becomes a much more community mind affair. So that’s one example of how, you know, a, a bank and institution is working locally to kind of affect change.

SIMRAN: And lastly, for the listeners and readers out there, what do you hope will be the main takeaway for people to remember the next time they apply for a loan or check their credit score.

EMILY: Actually check your credit score, uh, check your credit report every year. annually, you can do it more often, but annually is great. Pick a day every year, get your credit report, go over it. First, start with things like the basics. You wanna make sure all the basics are all true. is your name spelled correctly? Is your address correct? That sort of thing. Then you wanna make sure that every input on the credit report is yours. If you have a really common name, if you are Jane Smith or Michael Eng, it could be really easy for another Jane Smith or another Michael Eng’s credit products to get put onto your report. So just simply going through your report every year is the first step, that’s, that’s basic. Just do that. The other takeaway, which , this might be a little, like, touchy feely for some listeners, but, but hear me out. Your credit score is not a reflection of who you are as a person. A low credit score does not make you a bad person. It does not make you an untrustworthy person. Credit scores, fluctuate all the time for all sorts of reasons. This is simply one piece of information in your financial history. You are so much bigger than that. So try and keep that in mind.

SIMRAN: That’s my conversation with Emily Baron Cadloff her story is on the cover of the June issue and is live at thewalrus.ca. You can find the link in our show notes.

YASMIN Thanks for joining us on this week’s episode of the deep dive. It’s the final episode of the season. So we hope you enjoyed it. This week’s episode was produced and edited by myself and Simran Singh. Thanks so much to Emily Baron Cadloff for joining us this week. Music for this podcast is provided by Audio Jungle. Our theme song is ‘This Podcast Theme’ by Inplus music. Additional music is Stay Cool by Loops Lab, and ‘Podcast Intro’ by Inplus music. Additional music includes ‘Impact Prelude’ and ‘Inspired’ by Kevin MacLeod. Don’t forget to subscribe to The Deep Dive by The Walrus on Apple Podcast, Spotify or wherever you get your podcast.

CREDITS

SIMRAN SINGH:

This week’s episode was produced and edited by Yasmin Duale and Simran Singh. Thanks so much to Emily Baron Cadloff for joining us.

Music Credits:

“Impact Prelude” by Kevin MacLeod
Link: incompetech.filmmusic.io/song/7565-impact-prelude
License: filmmusic.io/standard-license

“Inspired” by Kevin MacLeod
Link: incompetech.filmmusic.io/song/3918-inspired
License: filmmusic.io/standard-license

The Walrus Staff

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