“I NEVER DREAMT that they were going to take my Visa away from me. That was a shock. I thought, ‘This year I’ll be good and I’ll fix it.’ But they took my credit away from me.”
Concordia student Brandi Goulding, twenty, first began struggling with debt after moving to Montreal. This month her Visa card expired with a $500 debt and no option for renewal. For Goulding, repaying this debt, as well as several student loans and a maxed-out $3,600 Future Shop customer credit card, has been a major challenge.
Her relationship with credit began shortly after her 18th birthday, when she applied for her first Visa card. “One of my best friends since growing up, her birthday is two weeks before mine. She got a Visa on her birthday. It was so easy. She walked in, she said she wanted one and a week later she had one. And so I decided, ‘Hey, if she can do that, I can do that too,’” says Goulding.
“It was a novelty. It was something I couldn’t do before and I wanted to do then. I wanted a Visa. And you know they’ve got the little shiny thing on there!” continues Goulding, indicating the holographs commonly found on today’s credit cards.
Goulding received her Visa after a short meeting with a TD representative; she filled out a form and was asked several brief questions regarding her employment status and income. Yet there was no discussion of credit ratings. Since then, Goulding has never requested a credit report. “Having a credit rating has not affected me yet – I haven’t hit that road yet. I’m really worried for when it does. The second I try to get a bank loan or certain jobs they are going to check my credit rating.”
Goulding is not alone. As consumers, we are all affected by our credit rating, a statistic that determines what we may buy, what phone plans are available to us, what credit lines we can open ,and what maximums we may obtain on our credit cards. Credit bureaus have existed for more than a century. However, as the market for credit cards grows and companies obtain an ever-increasing amount of information about their customers, new concerns are being raised about consumer privacy and the effect that these ratings have on borrowers, particularly students. Furthermore, these companies are part and parcel of North America’s credit economy, which critics blame for a host of problems, including the current economic downturn.
TRANSUNION AND EQUIFAX are by no means household names. But these two companies are Canada’s largest credit bureaus. Both companies are multinational corporations with headquarters in Atlanta and Chicago, respectively, and both are publicly traded on Wall Street.
The calculation of credit ratings is a big business. In 2001 Equifax had an operating revenue of just over $1 billion USD; by 2009, it had increased to over $1.8 billion.
I dial a passcode to enter a conference call with TransUnion Canada’s Director of Consumer Solutions Tom Reid. On the line company spokesman Reid and a PR consultant are discussing the previous night’s U.S. midterm elections. The interview that followed read like a crash course on industry lingo. In this man’s world, words like “delinquency” describe the failure to pay overdue payments and “leverage” morphs into a verb describing the use of knowledge toward economic ends.
Reid explains that his company offers a way for lenders to understand the risk that various customers represent. “The credit granting community doesn’t care what your score is, per se. Your score is just a label that tells them what the amount of risk you represent is,” he says.
The most important type of credit rating for consumers is the Beacon Score, which is graded on a scale of 300 to 900 and represents your likelihood of repaying debts to creditors. According to TransUnion’s statistics, nearly two thirds of Canadians have what the industry considers a “fair” to “very good” rating, ranging between 700 and 900. Companies like TransUnion additionally provide a wide variety of scores to calculate your financial habits – how likely you are to respond to a promotional offer, for instance.
“Each organization uses fairly complex empirical data and algorithms to determine the relationship between the characteristics of a borrower and the likelihood of a specific outcome,” says Reid.
These characteristics can be fairly wide-ranging. Certain statistical indexes also create consumer profiles not simply by referencing the sum-total of your shopping bills, but also by accounting for what you buy.
Research in this area has been accelerating ever since 2002, when Canadian Tire – which operates its own line of credit cards – began analyzing the relationship between customers’ shopping habits and delinquency. The most reliable credit users were found to have a penchant for premium birdseed. Unreliable borrowers, on the other hand, were more likely to buy chrome skull car accessories, and to frequent a pool bar on Concordia’s campus called Sharx.
Following studies like Canadian Tire’s, these kinds of purchases can also influence your ability to access credit. (If you want to avoid all this, deal in cash.)
“When a consumer makes a request for credit, that organization wants to look at what the likelihood is that the individual is going to become ninety days or worse delinquent,” says Reid. “The organizations want to know what the likelihood of delinquency is because that leads to write-offs, and that is a cost to that organization. So they are using tools from TransUnion to try and better identify who the optimal customer is for that organization from the perspective of risk.”
He explains that any time you apply for credit or enter a contractual relationship with an institution, you have allowed for your personal information – including demographic information such as social insurance numbers, birthdays and addresses – to be accessed by credit bureaus. Thus, a credit rating may reflect a large portion of your monetary history, potentially including but not limited to: the payment of utility bills, phone bills, medical fees, rent, car payments, mortgages, and credit card interest.
“The credit reporting agencies collect data from all of the credit granters throughout Canada. So we have a very broad perspective on how any given individual is performing with all of their credit obligations. We also understand the characteristics that relate to each of those individuals,” says Reid. He adds that the Beacon Score is designed specifically to predict the probability of delinquency. “What we try to do is identify specific characteristics related to an outcome, in this particular case [whether] that someone is going to miss three consecutive payments.”
IN LATE OCTOBER of this year, Bank of Canada Governor Mark Carney warned Canadians of the country’s rising debt-to-income ratio.
In 2003, for the first time, Canadians accumulated a collective debt greater than their income. The debt-to-income ratio – which has hit an all time high – now indicates that for each dollar the average Canadian earns, he or she owes $1.47.
Sam Gindin is a professor of political science at York University and the co-author of the recent In and Out of Crisis, a critique of neoliberal economic policy and its role in the current economic downturn.
Gindin argues that as worker benefits began to decrease in the 1980s, more labourers began to work longer hours. In the late 1990s this increase in work time began to level off and consumers started turning to credit for their purchases.
“In the sixties, when people were relatively secure, they were pretty confident and they were raising their wage demands,” he says. “And out of that, came a counter-attack. That counter-attack was to discipline workers. It was to let unemployment rise, clamp down on wages, and speed up production. So one of the things that happens is workers were defeated and they’re trying to maintain their standard of living.”
According to Gindin, increasing consumer debts in the U.S. and Canada are endemic to the global finance system. Foreign investors from nations like China heavily finance North American banks, which enjoy a reputation of stability. These infusions of cash, in addition to the Federal Reserve’s current low interest rate, create an environment more conducive to lending. Finally, advanced data systems allow banks to analyze risk in an increasingly sophisticated manner and thus, a variety of credit becomes available to the consumer in the form of subprime mortgages and shiny credit cards.
“There’s the global position of the U.S., which brings money into North America,” says Gindin. “And the whole financial system is competing to make money, and is therefore constantly trying to extend the boundaries of risk.”
He argues that this behaviour is reinforced by decades of government economic policy.
“You have to remember that for a quarter of a century [this system] hasn’t worked badly. So people figure there will be a crisis, the government will bail us out, and it will be contained. And even now if you take a look at the big investment houses and the big banks, they’re going to come out of this pretty well.”
AS CONSUMER DEPENDENCE on credit increases, so does the dependence of lenders on credit scores. But this statistic does not always provide a reliable reflection of a person’s or a company’s financial standing.
Brenda Shanahan is a former banker now writing her PhD at McGill on credit card companies. She also works as a teacher of financial literacy to Canadian soldiers. She explains that because lenders rely heavily on credit scores to recognize low and high-risk borrowers, consumers with good credit scores seeking loans are sometimes permitted to accumulate debts they cannot afford to repay.
“Your credit score may be good,” says Shanahan, “but just because you get the loan doesn’t necessarily mean you have the cashflow to pay it back. Now, with easy access to credit you have people who are able to obtain credit cards from various sources and max them all out.”
Credit rating agencies also analyze the financial health of major corporations. Because these companies are accountable to shareholders and seek high ratings, their credit bureau may experience conflicts of interest in which issuing a low rating might harm their business, whereas issuing a high rating may attract customers. This phenomenon gained international attention following the subprime mortgage crisis of 2008, when millions of houses in the U.S. were foreclosed as a result of mortgage delinquency. Bonds relying upon these payments that had formerly been top rated were sent spiraling in value.
Last month, the Financial Stability Board – an international organization established at the 2009 G20 London Summit as a response to the credit crisis – publicly advocated a decrease in the dependence of the financial community on credit rating agencies.
“[Credit bureaus] play this very important role in assessing risk,” says Gindin. “Now, the trouble with it is that they’re not independent from the companies they are rating. If you’re getting paid for these ratings, you want to be careful if you come down too tough on [a company]. So there’s this problem in the system: rating companies themselves are compromised.”
And credit ratings have fueled the popularity of credit. According to Shanahan, credit scores have allowed bankers to analyze the risk that customers represent at a speed like never before. As a result, banks have come to realize that the mass marketing of credit represents a greater profit than one-on-one decision making.
“Now, if your Beacon Score is good you get the loan,” she says. “If you are declined, end of story. The employer is not interested in employees spending two hours with one client when you can approve ten Visa cards in ten minutes.”
This ability to calculate risk based upon the information that credit scores represent has led these same banks and credit card companies to make offers to students and young consumers that did not exist even twenty years ago.
Shanahan recalls that in the past, companies would typically target students studying professions such as medicine, law, and business. However, in recent years this market has expanded to all students.
“The young adult in today’s society is still going through some very important developmental stages, and they’re not yet earning anything. Chances are you’re not going to have your first full time job until [later]. But you will have had access to credit since age 18. So you’re being led down a path where credit becomes like cash,” she says.
“Somebody figured out that not only most students would pay their credit cards, but that they wanted to buy their loyalty at the beginning of their careers, because the company that you tend to start dealing with, you tend to stick with. And so they even factored that in; even if they lost some money with students, the long-term market share that they would gain would pay off in the end.”
BANKS SPEND MILLIONS every year marketing credit cards to young Canadians, particularly university students. In 2005, the average Canadian university graduate left school with $18,000 of debt. Credit cards only exacerbate the problem.
According to Robert Manning, a professor of Finance at the Rochester Institute of Technology and author of Credit Card Nation, companies frequently forge lucrative deals with universities so that they may solicit credit cards on campus grounds.
“[Universities] should have been using a substantial portion of that money to promote financial education,” says Manning. “In the absence of that, what you have is the banks are basically training young people to learn the rules of the game that they want them to learn rather than to actually learn how to use credit and debt to their best advantage.”
Shanahan also worries that student debt will have major repercussions for the adult lives of youth growing up today.
“If a young person is leaving, as a graduate, with $25,000 dollars in debt, this would serve to delay really all their adult development and plans,” Shanahan says. “Economically that means it delays home purchases. It delays starting a family. If you lose your employment, then you are at risk for bankruptcy. This is what the generation coming up is facing: the chances of having periods of no employment are greater than ever.”
Goulding has witnessed this phenomenon take place at Concordia. According to her, the frequency with which banks solicit credit cards on campus has increased over the past year. “In Concordia’s library, every day there is a BMO bank set up [offering credit cards]. And it’s right in front of the stairs to go up into the library. So if you are choosing to study in Concordia’s library, you have to say no or listen to their spiel every time you walk by.”
Two years into school, Goulding has now accumulated $20,000 of debt, a fifth of which she owes to Future Shop and Visa. She says that she wishes that there had been a greater effort on the part of the banks to inform young consumers about credit.
“I think people need to be more aware as to what they’re getting themselves into. The banks need to inform people – just try to pay off what you can. I find banks to be very intimidating. When you’re young and you’re trying to figure things out that intimidation is a lot.”