While I was buying the iPhone, they pulled me aside for a credit review. Since I have good credit, this was shocking--and humiliating. For a middle class American, telling your two friends in the store that the AT&T folks are having second thoughts about giving you credit feels a little like confessing that you're a criminal. This is even though I know plenty of journalists with bad credit, the vicissitudes of the industry being what they are. I found myself earnestly protesting to the store clerk that seriously, I really do pay my bills on time, and I don't run a credit card balance.
It turns out they just wanted to look at the activity on my account, since I've just applied for a car loan, and bought a Verizon broadband modem. But in a way, it's a reminder of just how obsessed our society has become with borrowing money. The worst thing that happens to you if you borrow too much money is--it gets hard to borrow still more money. Yet during the recent financial crisis, commentators refer to bankruptcy, or foreclosure, as something akin dying of cancer, rather than losing your credit cards and moving to a rental flat. This may be because we so often confuse credit rating with moral virtue: good people have good credit, and bad people . . . well, best not say the "B" word out loud, lest the dread disease should spread to you.
I can't say that I've noticed that a good credit report is an obvious testimony to sterling character. I've known plenty of people with A+ ratings who I wouldn't trust to take care of my goldfish. And I don't even have a goldfish.
Of course there are irresponsible profligates who borrow money they've no intention of repaying. But most of the people I know with awful credit histories have rather more understandable explanations: a divorce. An unexpected illness. Trouble finding a job when they emerged from graduate school with hefty loans. Freelance jobs that took too long to pay--or went bust without reimbursing sizeable expenses.
The worst part is that the profligates are immune to the shame (or seem to be). It's the decent people, the ones who were overtaken by events, who cringe when the store clerks motion them aside.
Frankly, I'm rather happy to see this turnabout of events. Preferable, I would think, to the "use it or lose it" and free cards in the mail of the past decade that got us all into this mess.
I'm with you, Susan. I'd absolutely love the slow but inexorable collapse of the entire credit market and the destruction of our consumer-based economy.
That doesn't mean a depression or panic necessarily must ensue, not if the collapse is gradual. It just means the opportunity is there for the creation of something new.
Perhaps the consumer-based, credit-focused economy eventually may be looked upon by future generations as an anacronism in human history, much as I am certain the whole Industrial Age and the idea of the 9-5 job working for an employer will be.
I'm sorry - what? Social security numbers and credit checks to buy a phone? Are these things massively expensive, or is there some other dynamic at play I'm not grapsing?
First you were treated like a refugee, now you're being treated like a black person.
Sean E - I think this is standard when signing up for the contract, not necessarily the phone. They want to be sure that you can afford the monthly payment for the next two years.
If I'm wrong, then I'm more disappointed in Megan than in my brother's girlfriend, who just financed a dog.
Sorry, but I have to disagree with your assessment of money and moral character. Not disagreeing with any specific situation, in general, how people use their money does reflect their inner character, perhaps better than any other measure. Show me how a person spends their time and money, and I can tell you about the ethics and morals of that person.
"The worst thing that happens to you if you borrow too much money is--it gets hard to borrow still more money. "
I've seen this statement before on this blog, and it's just not true. It's not that you find yourself merely "losing your credit cards and moving to a rental flat." Both the profligates and those who "have rather more understandable explanations: a divorce. An unexpected illness. Trouble finding a job when they emerged from graduate school with hefty loans. Freelance jobs that took too long to pay--or went bust without reimbursing sizable expenses" find themselves hounded by collection agencies and may face garnishment of wages. Moreover, the new bankruptcy law has taken away a lot of the protections once afforded to those who have been driven into bankruptcy for the reasons mentioned here. It's not just a bit embarrassing. Bankruptcy causes real hardships.
Megan, you're forgetting 2 important things that check your credit:
-Many decent rental apartments (in my experience, all the ones close to work, but that might just be a coincidence)
-All car rental agencies. And living in a big city, renting a car for a few weekends when you need it is so much cheaper and more convenient than owning an old beater that you have to park somewhere. You can't even rent at some places without a credit card.
Those two things are far more important to me than financing purchases like electronics, furniture or dogs. [Well that's different, a dog is an investment and the secondary market for dogs is exploding!]
Kishin, I could be wrong, but to me your post suggests that you don't actually know much about bankruptcy beyond reading a few overwrought articles by consumer advocates. I've written pretty extensively about the new bankruptcy law, and while I wasn't a fan for a number of reasons, it's an enormous stretch to say it's taken away a lot of protections for people who find themselves in need of a discharge. More than 90% of the people who sought Chapter 7 under the old law would automatically qualify for it under the new law, and while there are new procedural barriers, these are modest and do not actually remove any significant protections--the biggest change in actual discharge protection was a modest change in the way that new car loans are handled.
Being hounded by collection agencies can also be described as "being asked to pay your debts"--the only authority that the agencies have to do is call again, and tell other people you haven't paid your debts. Likewise, the garnishment goes away in bankruptcy, unless you are either trying to hold a secured asset, or being garnished for tax debt, government-sponsored loans, or child support. Overall, getting into heavy debt is, absent the cultural anxieties of the upper middle class, has some the least bad consequences of poor decision-making, or fate.
I'm not saying that financial trouble is fun. But it's considerably less objectively disturbing than, say, making an awful marriage--it's the social stigma that makes it loom so large in our imaginations.
"The worst thing that happens to you if you borrow too much money is--it gets hard to borrow still more money."
... and that sorry person gets to walk away from the store without their iPhone. Or away from the real estate agent without their new house (with its tax-deductible interest), so they're stuck in an under-performing school district. Or they get hit with late fees, meaning them owe even more money. Or they're continually harangued by collection agents who threaten to reposess your car, or your house, or whatever else you happen to own, if you can't make payments.
Megan, I've read this blog for several months, and I always seem to learn something from it - but that has to be one of the dumbest sentences I've read in a while. Not making payments actually does have real-world consequences, and you know this (even if you don't know you know it). Do you really pay your bills on time, only because it will make borrowing money easier?
Damn whiner...
Damn whiner...
Or away from the real estate agent without their new house (with its tax-deductible interest)
That is probably a great financial decision for many people, especially those that have troubles paying off much smaller bills. I don't know about your city, but in San Diego you can rent in all the high-end areas, no need to live in a bad area with crummy schools.
The consequences you listed, seem exceedingly light especially since that is the worst that happens when you walk away from hundreds of thousands of dollars in debt. The main consequences of not paying for your car or house, is that the institute that bought it (the bank) gets it back. You don't own a thing until you pay off that debt.
Tel,
Are you serious?
Meghan said it makes it harder to borrow money. Isn't that the same thing as "Or away from the real estate agent without their new house (with its tax-deductible interest), so they're stuck in an under-performing school district."
I know you're trying to be snarky but what you said doesn't even make any sense...
Tel - Are you serious? What part of the Constitution says that a person should have the right to overextend their obligations to some other person in order to move to a better school district or to keep their car?
How about we bet that the people who overextended are more likely to have a big-screen LCD TV than to have moved to a better neighborhood, and that their car is larger/newer/more expensive than their other expenses should allow given their current salaries.
Like Megan said, Chapter 7 allows them to go on with their life without having to spend any time after paying off the remainder of their debt and having to re-prove to lenders that they are worthy of borrowing. That is a remarkably lenient outcome. I see no justifiable reason that they should be entitled to more.
"I'm not saying that financial trouble is fun. But it's considerably less objectively disturbing than, say, making an awful marriage"
As if there isn't a causal relationship here.
Tel,
You managed to follow-up this declaration:
with what is by far a DUMBER sentence:
Note: You don't OWN your house, your car or any other secured asset that you are making payments on. The lender has allowed you use of the item while they still own it and you are making payments on it. When those payments are completed, title will transfer to you, and then you will own it.
The only scenario like this where you own something is a HELOC, HEL, or second mortgage where you promise to give them your house if you don't pay them back.
Isn't that the same thing as "Or away from the real estate agent without their new house (with its tax-deductible interest), so they're stuck in an under-performing school district."
Not really. Or at least, that's market dependent. You can rent in Cupertino (good school district) for what it would take to buy in Fremont (not so good district 20 miles of crappy pavement from anywhere you want to be).
Of course, to rent in Cupertino, you need to pass a credit check ...
To jmo - I am being very serious. Borrowing too much money means that you can't afford to pay it all back. That means that you start getting late on payments, resulting in a worse credit score. If that score gets sufficiently bad, you will not qualify for loans (as Megan did mention). But this means more than, oh, I didn't get the loan I was trying to get. It means that the person can't advance their life by making wise investments, such as buying a home, because they no longer qualify for a rate they can afford.
To Avner - I never said there were such rights. Megan said that there were no worse consequences than not being able to borrow money. I disagree - there are actual, real-world consequences to not making payments, regardless of how deserving or not the bankrupt person might be. Even under Chapter 7, isn't most property of value (other than household items) sold in order to pay the debt? This seems to be significantly more of an inconvenience than "not being able to borrow more money." If a person is forced to move into a cheaper place, there's the expense involved with moving. Not to mention the time spent dealing with the whole mess. So, yes, I still think that Megan's statement is dumb.
To Skullberg - I would think that there are quite a few people who own their car, but not their house, who would run into this. Even people who own their house outright can get into debt problems if they're foolish with credit cards, or if they have few liquid assets and the assessment goes up.
You've written before about those attitudes which, though we take them for granted, are central to the success of our political system. For example, though we both the US and Mexico have corruption, we view it as a crime and morally reprehensible. In Mexico bribery and corruption are accepted as de facto parts of their criminal justice system. Thus the Mexican government has many, many more problems in establishing rule of law and maintaining order.
Could your feelings of shame about having bad credit also be part of a broader system of social morals, in this case morals that quietly underpin our credit system in a similar way? Certainly having bad credit carries with it some hardship, but as you say in your post, those hardships are hardly terminal.
Carried further, could we be undermining the necessary social morality for credit with our response to the current housing crisis? If the borrower is merely the victim of predatory lending practices, the bank a victim of a lax regulatory environment and the regulator a victim of too narrow a mandate, then where does the ax fall? The only people being trotted out for public humiliation are high level actors like the Countrywide execs and the management team at Bears Sterns- as if only a few bad apples were to blame for the whole mess.
My perception, I admit, has more to do with the media portrayal than actual events. But pereception here matters as much as facts (truthiness jokes aside) because if the meme that is transmitted is that a few bad apples caused trouble in an otherwise admirable system of borrowing to the hilt and negating any chance for actual saving, then couldn't this erode the very unspoken social concept that makes our system of debt possible? If the advance of credit to further and further reaches continues apace then defaults and bankruptcies will follow suit. And if those become common enough then their social stigma might be lost.
What then? Should that shame be eroded, that shame you felt in the Apple store when even the suggestion that you might have bad credit was disclosed, should that sort of stigma be washed away, what then will happen to our credit system?
As a side note, I know, rather dimly I guess, of the concept of moral hazard and I suppose I just longwidedly rehashed an arguement for why we should be cautious of it. My concern is how, perhaps, not enough is made of the danger this poses to our financial system.
I nominate MikeB for Thread Winner.
Our system of credit in this country works not because of our system of laws, but because everybody believes it works. The fundamental rule that we believe is that when you borrow, you pay back applies to lender and borrower, rich and poor. Once that belief is gone, all the thicket and underbrush of rules and regulations isn't going to save our credit system.
Then, we'll have a real credit crunch.
Tel,
Meghan said if you borrow money and don't pay it back it means they end up living in a "rented flat." "Living in a rented flat" = "It means that the person can't advance their life by making wise investments, such as buying a home, because they no longer qualify for a rate they can afford."
Tel,
In the cases you mention there, no one repossesses your house or car, you sell them to make good on your debts. Mastercard has no claim on your actual property, just the monetary value behind it, so they can't harass you and "threaten to reposess your car, or your house, or whatever else you happen to own," they can simply demand their money that you owe them - even if that means selling someone else your house.
If you are simply talking about being forced to sell assets to raise capitol, phrasing it as repossession is an extremely odd way to do so.
Megan,
If they give you grief about poor credit ratings, just tell them that the Fed has agreed to lend you money.
Actually, borrowing too little money also makes it hard to borrow more money. My husband has never had a credit card, had a car loan for about six months in 1998 before paying it off early, and paid his student loans off as soon as we got married. We couldn't get approved for a prime-rate mortgage a year ago, even before the real credit crunch hit, despite having better than a 50% down payment, a high income with no other loans, and tens of thousands of dollars of cash in savings and investments, because he had "no recent credit history".
I was more than a little ticked off about being punished for our fiscal prudence, rather than for profligacy. And yes, it did make me feel humiliated -- I mean, who can't move because they can't get a mortgage, except for people who are bad with money?
Emma -- this is terrifying. Were you able to get the loan at a decent rate?
jmo - "Not being able to buy a house", does not equal, "not being able to advance your life", or "not being able to make wise investments".
Your credit rating ideally reflects society's belief/trust that you will pay back people you have borrowed from. No, this is not identical to moral virtue or good character, but neither is it completely detached.
Yes, I'm sure that having never borrowed any money from anyone, one is likely to feel a little superior, and one will be surprised that this self-reliance isn't seen as virtue by all. But it actually does fail to speak to the question of "will you pay what you owe?"
It seems perfectly reasonable to worry that someone who has never borrowed in their life, and now seeks to borrow, is in some sort of dire financial situation and is less likely to be financially sound in the near future.
On the flip side, someone who has spent their whole life borrowing and repaying has shown that they can be trusted to borrow. And when any company gives you goods and services in advance (like cell-phone service, rental cars, etc.) you are effectively borrowing from them, even if they're not officially calling it a loan...
Credit is in no way necessary to build wealth, but it is necessary for somebody to live far beyond their needs for a short period of time. Primary residences are not an investment, they are at best a forced savings account you can live in.
Yep, just like that between falling barometers and rain.
ISTR back in the 90s there being a study that found that when making business loans (not personal or mortgage), the single best indicator of risk was the business owner(s)' personal credit rating. The other three C's of business lending -- collateral, character and even cash flow -- paled in comparison.
I try not to be so in love with items that I can't just walk away from them if the sales folks act like abusing me is part of the sales pitch. In our part of the country (and I've found this to be true in many areas), AT&T provides abysmal service, with the slogan "No bars in more places," so even though I'm typing this on my Mac, and I would love to have an iPhone, I'm not gonna subject myself to some bubble-gum snapping kid looking at my credit rating - I'm staying away until Apple makes a better business decision.
Re: All car rental agencies.
Unless they have some way of doing so without leaving a trace on your credit report, I have never had a rental car agency check my credit. Maybe this happens if you are renting without a credit card? (I have always used one) As long as you have a credit card with available credit they pretty much assume you are creditworthy.
One experience I did have last year that infuriated me: I was turned down by Enterprise for a rental car because I had been involved in a traffic acident earlier in the year-- an accident that was not my fault (I was rear-ended in stop and go freeway traffic) and for which the other driver, not me, was cited. Was the company superstitious maybe, believing that innocent drivers may nevertheless someone attract accidents psychically?
One accident with the other guy at fault is not IMO a sign of you being a bad driver or in any way a risk.
If it was A LOT of accidents with the other guy at fault it might lead people to think that maybe you where not careful enough to avoid accidents, or that maybe you just drive a lot and/or on high risk roads. The later would not in any way be something to blame you for, but it would result in you being a higher risk from the perspective of the rental car company or the perspective of an insurance company.
But just one not at fault accident? That's ridiculous as a reason not to rent to you.
Also I've gotten cars from Enterprise right away after an accident that was my fault, and also after not at fault accidents, so can't understand the problem if that was the only issue.
dear livejournal,
today i went to the store and they checked my credit.
mood: embarrassed
music: "Cemeteries of London" by Coldplay
It's absolutely insane to check credit for apartments and non-cash handling jobs. As a person with poor credit, I suffer from that.
Why? Because getting a steady income stream from a decent job is what is needed to actually improve your credit and make good on debts. You can't tell people "stop mooching, pay up" and then deny them the means to do that.
Also, in many areas of the country, the best jobs are in areas with nice apartment complexes. So if the complex can say no--despite their powers of eviction and the lack of your ability to walk off with the apartment under your arm-- then actually improving your situation becomes difficult.
Why nobody prohibits any of this stuns me.
The best antitode to getting debts paid is for the person who must pay to have a steady income and a roof over their head.
One experience I did have last year that infuriated me: I was turned down by Enterprise for a rental car because I had been involved in a traffic acident earlier in the year-- an accident that was not my fault (I was rear-ended in stop and go freeway traffic) and for which the other driver, not me, was cited. Was the company superstitious maybe, believing that innocent drivers may nevertheless someone attract accidents psychically?
Did you have any other recent speeding tickets or other traffic citation history that might have made them edgy? Have you checked to make sure your insurance company doesn't somehow have you incorrectly flagged in their system as a result of this accident? Etc.
If you were in line at the rental desk and have the moxy to pull it off, that would be the time to crowd the desk and politely but firmly demand the phone number of whoever at Enterprise Corporate has the authority to deal with your complaint. Upon receiving it, dial it on your cell phone right there at the desk, and melodramatically explain that you are STANDING AT THE DESK and were just denied a car due to an ACCIDENT THAT WAS NOT MY FAULT and are calling in regards to the agency's BAD SERVICE.
I'll bet you get funny looks and fast results.
Re: Also I've gotten cars from Enterprise right away after an accident that was my fault, and also after not at fault accidents, so can't understand the problem if that was the only issue.
The accident was the only issue on my driving record. No tickets, no other accidents. I suspect that each Enterprise franchise is free to set its own policies in this regard, and this one (based at the Akron-Canton airport, as a public service warning to others) simply went overboard on caution.
In fact it could simply have been an overzealous (maybe new) employee who had been told not to rent to people with at-fault accidents on their record, and interpretted that as any accidents at all. (It's also possible that the Florida DMV doesn't bother to note accident fault when downloading this info to rental companies. That would be typical of Flori-duh)
Re: It's absolutely insane to check credit for apartments and non-cash handling jobs.
Most landlords dont care about your credit rating, bankruptcies etc. What they are looking for is quite specific: are there legal judgements against you from prior landlords? A credit report is a very quick and fairly cheap way to get that piece of info.
Re: Did you have any other recent speeding tickets or other traffic citation history that might have made them edgy?
See above. No, my insurance company did not count the accident against me. And yes, maybe I should have made a scene, but I wasn't in the mood for scenes, and instead contented myself with taking my business elsewhere-- Thrifty rented to me without a moment's hesitation.
It's absolutely insane to check credit for apartments and non-cash handling jobs.
I don't know anybody who had a credit check when being hired, except for my brother who needed to obtain secret clearance for a job in the defense industry. I can see why a credit risk might be a problem when working on secret weapons systems.
Secondly, on apartments, I had bad credit out of college but never had a landlord turn me down. Most looked at my stable rent history and called previous landlords to ensure I always paid my rent. Secondly, you can do huge financial damage to an apartment complex. If you fight eviction it can drag to over 3 months, and in that time you could cause thousands on damage on top of the unpaid rent. This can quickly take an apartment complex from the black and into the red for the year.
I'm a drab and predictable guy. I buy gas, groceries, and go to Home Depot. Year after year. Some mail order, for stuff to be delivered to my house. Then: Vacation! Air Travel! Tickets! and they checked my credit, because it was an unusual expenditure of $6000. Seems sensible to me.
RE: Enterprise
Enterprise's business model is based on insurance replacement rentals, so it's odd they would deny you a car because you'd been in an accident. Probably a third of their customers are there because they've been at fault in an accident.
(I'm not doubting they actually told you that. It just seems weird.)
Also, their locations are not franchises - every single Enterprise in the country is owned by the same person.
Yes, I once worked at Enterprise. I don't recall ever running a credit check on someone, although we generally required a credit card to rent. I also don't remember being able to access DMV records, although that may vary by state.
No, you are completely wrong.
You may not be able to get a JOB b/c of bad credit. If you were laid off twice during the internet bubble burst, as my husband was, you might have used up all your savings being good the first time, but then the second layoff ruined you.
You can't just run away from car payments and rental contracts. And if you are self employed and have a heart attack followed by triple-bypass, like my dad? Doesn't matter if you make your lease payments or that you've been a 'preferred customer' for over 20 years at the car dealership. They still come and repo your car in the middle of the night like you're a deadbeat-->yep, it happened. Honda had to refund his last payment b/c he'd made it on time. They didn't call or write as they always had in the past when the lease was running out to see if he wanted to buy it or upgrade. They just came and took it in the middle of the night--b/c despite the fact his relationship with them was stellar, he'd had to declare bankruptcy--and that makes him a deadbeat unworthy of any respect.
It doesn't matter if you have had perfect credit for years and years and one event--no matter how understandable--tanks you. Once your credit is bad, you are doomed.
Yeah, sounds like hyperbole, but it's not. If you are late with one card, any other card can run your credit report on a whim and raise your rate to 29.9%--even if you've been a customer for years and never missed a payment with them. The CC companies are not hurting here--they make out like bandits with their usury rates and the random 'fees' that don't get counted as interest.
How are you supposed to pay your debts if you can't get a job? My husband had a corporate card for expenses and travel. Company changed policies to make each employee liable for their cards. Due to bad credit, husband had card taken away. Now we're shaking, b/c despite the excellent performance review he just had and the deals he's closed, once some corporate wonk realizes he no longer has a card, he's probably going to be fired.
Not b/c he was irresponsible with the card. Not b/c his work is unacceptable (he's going to club if he's not fired). But b/c his credit isn't good.
And if he loses this job, we have no choice but bankruptcy. We have no credit card debt, but we can't pay the mortgage if he doesn't have a job. We can't pay for the car and we can't buy food. We can't take the kids to the doctor b/c we'll lose insurance. And all this hell is rained upon us b/c we lost our good credit rating 5 years ago and haven't been able to fix it.
And you practically can't get jobs anymore without good credit. So guard yours if you still have it.
Re: . I also don't remember being able to access DMV records, although that may vary by state.
Maybe this is something new? The guy at the counter definitely had my driving record on the screen. He quoted both the date and location of my accident.
Tel:
"It means that the person can't advance their life by making wise investments, such as buying a home, because they no longer qualify for a rate they can afford."
Even with pretty bad credit, if you have 20% down you can usually buy a house. If you're in such bad shape that you're struggling with all your other obligations, maybe homeowners insurance, PMI, ad valorems, and maintenance expenses aren't too wise of an "investment."
I'm of the opinion that people need to temper their expectations of what kind of home they "need" or "deserve." In the real estate licensing process, we're presented with problems that ask us "given an underwriting requirement of a debt service ratio of no greater than 41%, what is the *maximum payment the applicant can afford* ? That seemed to me to be completely backward, and the wrong way to help someone looking for a house. But, you know what? People looking for houses do the exact same thing. It seems to me that if your goal is ultimately to accumulate wealth, it's stupid to skate up to the very edge of where underwriters think you would be unlikely to repay the loan.
Megan,
You said you just applied for a car loan.
My friendly advice: Don't EVER borrow money to buy a car. EVER.
I can't say that I agree with you Tony. Sure you are paying interest on an almost certainly depreciating asset, but you might be paying a very low rate of interest. And yes maybe you can get a used car without needing a loan, or some people can wait and save up for new or nearly new car, without having to have a car first. But most people have a great need for a car, and for many a new (or least nearly new) car is worth it to them.
If you had said "think twice before borrowing money to buy a car", I might agree, but you made it an absolute categorical statement that you should never do so. That isn't IMO reasonable. Many people will get more utility and satisfaction from having a new or nearly new car than they will lose from the cost of interest. Others will need to borrow to even get a car that isn't "nearly new".
And when you do get a car, its not like you can't keep it for long past the period when you are making car payments.
What you shouldn't do is consider the purchase to be an investment. Its consumption. But borrowing for consumption isn't universally a bad idea.
Well in a sense allowing yourself to get to a better job, is an investment in your future income, but the car itself won't have a positive return when you sell it (except perhaps for cars that have or later achieve a collectible status, but that isn't very likely in the vast majority of car purchases)