What price better credit

By Felix Salmon
December 21, 2009
check out those fees:

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First Premier Bank is (still) offering one of the most usurious credit cards I’ve ever seen. The APR is reasonable, at 9.9%, but just check out those fees:

Account Set-up Fee: $29.00 (one-time fee)
Program Fee: $95.00 (one-time fee)
Annual Fee: $48.00
Monthly Servicing Fee: $84.00 Annually
Additional Card Fee: $20.00 Annually per card, (if applicable)

All this on a card which has a total credit limit of as little as $250. You’ll notice that even without the Additional Card Fee, the compulsory fees add up to $256, and so First Premier helpfully charges $7 a month instead of $84 up front for the monthly servicing fee, to prevent you from exceeding your limit without spending a penny. Even so, the amount of credit you actually get to spend will be a maximum of $71 on a $250 card.

The good news is that this kind of rip-off will soon be illegal; the bad news is that First Premier, undaunted, is simply getting around those restrictions by jacking up the APR to 79.9%.

Who would voluntarily sign up for that kind of offer? There’s talk from CardHub CEO Odysseas Papadimitriou of “people in true emergencies”, but the fact is that if you’re really in a true emergency, you’re unlikely to have the time or the ability to apply for the card, wait for it to arrive, and then make your payment using it.

There’s another group of people who sign up for offers like this, however: individuals with bad credit who think that the best way of improving their credit score is to borrow money and show that they can pay it back — even if they actually have the cash they need to make their payments up-front. The fees and interest payments associated with the card then become a direct cost of improving one’s credit score.

This doesn’t only happen on cards with $250 credit limits, either. Check out this application for a $21,250 loan at Lending Club: it’s someone with a loan grade of B5, who will borrow at 12.53% over three years to then lend the money back to people with better credit than himself. He’s guaranteed to lose money, but he wants to “improve my credit history for better future loans” and thinks this is a good way of going about that.

The loan is still being underwritten by Lending Club, and might not be approved — although ultimately all they can do is check to see whether he can repay the debt, it’s not up to them to make a judgment on the wisdom of investing the proceeds of the loan in other loans.

All of this makes me rather sad. People don’t want simply to be in control of their finances; they specifically want a higher credit score, and they’re willing to pay up to get one — even if doing so at the margin hurts their financial situation. It’s a bit like someone deciding they need to get healthier and then judging their progress by weighing themselves, and ending up going on a disastrous crash diet to lose weight: it defeats the ultimate purpose. But the need for external validation of progress towards a certain goal is so strong that people will act in self-defeating ways to get it.

I would love to see much less emphasis on credit scores when it comes to financial literacy — financial educators often leave their clients with a desperate need to achieve a higher credit score at any cost. Instead of looking at scores, people should just try to concentrate on overall financial health, and check their credit reports (not scores) at annualcreditreport.com in order to make sure there aren’t any errors there. But it’s not going to happen: the entire financial industry — including many non-profit financial education outfits — is far too caught up in these scores. More’s the pity.


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This is an outrageous credit card.

The fact that it is allowed to be marketed is proof positive (to me) that there is no government agency established to protect the consumer.

Some people need protection against ding very stupid things.

Posted by MarkWolfinger | Report as abusive

Just a comment on the lending club loan. I am a lending club investor and found that exact loan last week. This type of loans were (I can’t invest at Prosper now due to the SEC crackdown) not uncommon at Prosper but these borrowers usually invest in poorer grade loans so that they can make money. Felix, I am not sure if you have an account there, but this borrower has a 780+ credit score, so when I saw this, I didn’t think boosting credit scores is a major motive. I thought this person was trying to make money but has his/her math backwards, so I sent the question last week, which has yet to be answered publicly.
By the way, the credit ratings at lending club is not based solely on the credit score. It depends on various factors, such as the loan amount taken, inquiries on credit report, credit utilization, etc.

Posted by fix | Report as abusive

They should make credit rating scales work the other way — so that 200 is good credit and 800 is bad credit — so that at least someone with a high score would feel better about it.

Posted by q_is_too_short | Report as abusive

The way credit agencies calculate credit scores is seriously flawed. For example, a few weeks after I sold my house and parked the equity in my bank account, my credit scored actually dipped under 800.

So someone having $100k+ balance in the bank doesn’t mean anything positive, but paying a mortgage of over $300k is considered a better credit risk. Does that make any sense?

I suppose it does, if you’re in the lending ‘community’ trying to decide if you want to lend money to someone. But credit scores are used in too many other ways now – landlord, potential employers, etc.

Maybe there should be another score that evaluates if someone is financially responsible, preferably based on that person’s balance sheet, not their borrowing history. In other words, if someone has never borrowed money, he should be considered wildly responsible, instead of being punished for not having a credit score!

Also, debt should never be used to finance consumption – such as cars, vacations, electronics, etc. That should be a no-brainer, and should be taught at home economics class at schools. Loans should be limited to things that will generate greater returns, such as college education, professional development, or starting/running a business.

Unfortunately, American style easy credit is now being promoted relentlessly in developing countries such as China and India. The lending industry has happily ruined many lives here, and are now marching toward other countries and laying the ground work there to ruin more people.

Posted by jian1312 | Report as abusive

People specifically want a higher credit score rather than to be in control of their finances because to “the market” scores matter substantially more than anything else. Apply for a job? They’re going to look at FICO first. Apply for a mortgage? Underwriting is dead: FICO first. Security check? FICO first. Ask around; I am not making this up. For pretty much anything that matters these days it’s FICO first, facts last.

So it is not sad that people care about scores first and are willing to jump through whatever hoops Fair Isaac’s model tells them to. That is the rational response to a dysfuncitonal market. What’s sad is that despite clear, uncontroverted failure of Fair Isaac’s models and the victory of logic, facts and old-fashioned underwriting, “the market” still thinks, FICO first.

FD: I have a ‘thin file’ which means that despite a top-decile household income, zero debt and two decades of paying my bills, a college student with no job but a ten-year history of scraping up payments for department-store credit cards has a better FICO than I.

Posted by wcw | Report as abusive