Credit has long existed with its interesting history from the old merchant’s association to Henry Ford and Mr. Singer creating the first installment plans. In this episode, Merrill Chandler talks about the insider secrets to the credit bureaus’ playbook. Taking us behind the scenes, he pulls back the curtain on credit bureaus and their motivations. He also shares some credit bureau “loopholes” and how we can avoid them.
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The Truth About the Credit Game
How the Bureaus REALLY Work
In this episode, we’re going to be talking about the insider secrets to the credit bureaus playbook. I want to make sure that you hold on fast because we’re going to be looking behind the scenes, pulling back the curtain on credit bureaus and their motivations. This is a big deal. To understand where all of this started, just like we did on the insider secrets to the lender’s playbook, we’re going to go back in time. Credit has existed ever since like you see in Western movies. You got an agrarian society. You got to a merchant who has seed, shovels, picks and etc.
How Credit Began
They come in and say, “If you give me three sacks of seed, I’ll give you four back at harvest.” Between us, that’s a 33% return on investment for the merchant. Everything was neighborly. Everybody knew each other in a community. Nobody could just waltz into town and say, “I’m going to go out to the South 40 and build myself a cabin and bought me credit.” Everything was based on a very tight-knit community. This was the same for 10,000 years. If credit was extended, it was extended based on the relationship you had with the merchant or the other farmers and growers in the area.
That began to change in the late 1800s, early 1900s because when the industrial revolution hit, there began to be an industrialization of credit as well. Two examples of manufacturers who began to allow payments over time were Mr. Ford and the Singer company. The Singer family began selling sewing machines, but they were so expensive that they allowed families to make payments over time. We call those installment loans. It’s the same thing for Henry Ford. He allowed individuals to purchase one of his cars and pay it over time. These auto salespeople started financing these larger and larger purchases.
The dawn of credit reporting was that in these areas, in these communities, it became more and more difficult. You could have a tab with the local saloon or the bar. You could have it with the butcher, the baker and the tailor. You might have a credit account. Remember, all personal, very intimately connected with them knowing you, the baker would keep a tab. The butcher would keep a tab. The tailor would keep a tab. The merchant who sold seed would keep a tab. Individuals would have individual relationships with their various lenders.
The interesting thing is that as more and more cities grew and more and more people were moving to the cities, then the intimacy of knowing everybody in the community became more and more diluted. What occurred was merchant associations began to be established. A merchant association is where all the merchants in a borough or a neighborhood would all get together. They as merchants would pay 1 or 2 people to keep track of their tabs. They didn’t have to keep tabs anymore. This is what’s happening in 1910, 1920 and the 1930s.
These merchant associations would gather data from all of the participating merchants. If you weren’t a participating merchant, you didn’t get the inside scoop on how John Brown or Mary Smith was doing in paying their butcher bill, tailor bill or dairy bill. If you’re a member of the merchant association, you got what was called a credit report. These were all hand designed and hand developed in double entry, big old books. There were no computers. Everything was done in longhand. Every merchant had a page in these books. When somebody would ask for credit, they could go to the merchant association and say, “How does John pay his bills? How does Maynard keep up with what he has put on his tab?”
These merchant associations began to grow in more and more influence. One of the biggest ones was in Chicago. If you know any credit bureau history, you’ll know that Experian focuses on the West Coast and has offices in Texas, but it’s centered in Southern California. Equifax is in the Southeast and centered out of Georgia and TransUnion. TransUnion is the only privately held credit bureau. All the others are publicly traded. TransUnion is still privately held, which means closely held. Google the roots or the beginnings of TransUnion credit bureau because some of the merchant associations also had muscle.
Some of them with the Capone days, the gangster days, they kept tabs and books on participating merchants. This process was not innocuous and innocent in all of its cases. There is a sorted history. I’m not saying any of the others are not without this, but I know that TransUnion had a very interesting and colorful, “Who am I to talk? I got a colorful background. I don’t cast stones.” What I do tell you is what is called blacklisting, the merchant associations could discriminate against people of race, creed and color. What happened was that the Fair Credit Lending Act, those all came out because people were being blacklisted and unable to get credit at local merchants, even though they lived the same community that anybody else did.
The Fair Credit Reporting Act
They were being blacklisted and not given the chance to have credit. In 1971, Congress passed the Fair Credit Reporting Act. That’s where it said, “You’ve got to be able to prove that those things are legitimate entries on your credit.” Fair practices in lending all started in this same time, the late ‘60s, early ‘70s. The people, nothing but their financial history was used to make a determination of their, what was used to be called creditworthiness. How creditworthy are they? We call it professional borrowerness. It’s not about being worthy or not. It’s about you do have the borrower behaviors that make you a professional borrower and therefore make you fundable.
These merchant associations evolved. In 1992, I got started in credit repair that we formed Lexington. There were dozens of merchant associations still in existence that hadn’t been swallowed up by the big three. They practiced on their own. There was the Southern Florida Merchants Association. There was a Southern Texas Merchant Association, and Utah. If we had a client at Lexington who was from Utah, we’d send a dispute letter to what is now Experian and they would forward that letter to the merchant association in Provo, Utah.Necessity is the mother of invention. Click To Tweet
Since I have been in this game, there are no merchant associations left that are specifically credit reporting. They’ve all been absorbed by the big three. It is relatively history that we don’t have these merchant associations anymore that are keeping local contact. As we know, credit bureaus went into collecting data from the lenders. The more specific the data, the more clear the reporting. Another thing that popped up because of what I used to call the unholy Trinity. Their business model like Experian, TransUnion and Equifax had a policy of very sloppy customer service and very sloppy record keeping.
Necessity is the mother of invention. I started Lexington with a couple of my partners because the bureaus were doing such a horrible job. Someone had to hold them accountable for bad record-keeping. Two things happened. First, that was the early ‘92. In 1996, the Fair Credit Reporting Act was amended to tighten up the restrictions for reporting inaccurate data. That was reinforced by the bureaus. At the same time, there was also a credit restoration. It’s called the Credit Services Organization Act. It basically limited credit repair services. You had to be bonded and you had to be credible. I was so proud, even though credit repair does not make you fundable.
I started out in an industry that made credit bureaus be honest about the reporting. I also led the charge on creating a regulatory experiment where credit repair services had to be regulated. I went back to a Credit Repair Summit and we help craft language for Congress to implement in that bill because everybody was legitimate. They wanted to keep all the people out that aren’t legitimate. People are desperate to get credit so they’ll say anything and not do the work. It was the Wild Wild West when we founded Lexington. There are great checks and balances both on the credit bureaus and on people who are trying to take advantage of people who are desperate for credit.
The Rise Of Credit Repair Services
The rise of the credit repair services wasn’t an exact response to what I call the bad business became big business and keeping horrible records. FICO has been working on predictive analytics and a lender facing credit score since the ‘50s. These FICO credit scores did not become borrower facing until the late ‘90s. That’s when they began to be influential. 2001 was when myFICO became the place, the FICO organizations started allowing borrowers to see at least some of what the lenders were looking at. What we want to cover is how the depersonalization of you as a borrower.
In the late ‘70s and the ‘80s, when computers started becoming a real way to capture data and process data, we immediately became data points and not customers. The databases, you’re their subject matter. You’re not their client. Lenders are their clients. The credit bureaus collect data from lenders so they know about you. All this data that was being collected was being rented to FICO so they could look at all these transactions and start building these crazy predictable algorithms so that they could find out what borrower behaviors work and what borrower behaviors don’t.
Credit Bureau Loopholes
I’m going to share a couple of what are called loopholes. It’s illegal for the credit bureaus to use your age in an evaluation of your credit. Interestingly enough, there’s a significant correlation that most people get their first credit account at the age of 18 to 21. If your oldest account has ever been on it, it can be closed. If it was started twenty years ago and you have a twenty-year history of credit, they can infer from that data that you are a middle-aged established businessman or woman. You’re an employee, but you’ve got a history. While they can’t use your age, they do age all of your credit accounts. That’s why we talk about in the bootcamp and my book why age for your revolving accounts is important and how long is your credit history.
They do know how to operate what I call loopholes. They’re not technically loopholes, but it seems like if this were a football game, they know how to do an end-around. One of the other ways that they do this is that whole debacle that I talk about in the bootcamp. For those of you who’ve been, you know that I get fired up about this, where they started offering credit scores that lenders don’t work with. We’ve talked about in previous episodes, their FAKO scores and FICO scores. These guys found the loophole and said, “We’re going to offer credit scores with these consumer disclosures.”
Once again, they begin using the data for profit, but many times, it’s against you, the borrower. That is part of their end game and we need to be aware of is that every time there’s been an amendment of the Fair Credit Reporting Act or otherwise, the credit bureaus have huge lobbying arms. They literally have their arms far in the pockets of the politicians. There are lobbyists who have built lifelong relationships with the powers that be and Washington. The Fair Credit Reporting Act could be more protective of borrowers. FICO doesn’t even use seven years to keep a negative item on a credit report.
It stops calculating sooner than that. Remember how we talked about the 24-month lookback period? We do need to know a little further back on some delinquencies, but seven years derives from the ancient mosaic law of the debtor’s prison. If you go into debt, you or a family member have to go work for the person you owe and you pay back after seven years. That is literally ancient religious dogma and it’s lasted all the way. That’s why we keep seven years. To my awareness, FICO does not use a seven-year mark independent of whether or not the bureaus is data that’s on a credit report. Most of the FICO filters are all about the most recent 24 months. We need to remember that they are looking to capitalize on our ignorance.
Every transaction that you do, be aware that they’re looking to collect data on you and/or looking to make you an offer that you don’t know maybe bad for you. Here’s another perfect example. I’m in Salt Lake. I fly in and out of here all the time, sometimes 2 or 3 times a month. You’ve seen this where you go walking by and somebody sitting there from Southwest, Delta, American Express or whatever, and they’re offering a teddy bear or 50,000 points or some goodie if you fill out an application. That’s the equivalent of those retailers and merchant cards that I say, “How to ruin your credit and save 10% on your next purchase.” Some of the bigger banks and offerings do as well.People are desperate to get credit so they'll say anything and not do the work. Click To Tweet
They’re mostly co-branded. I flew in from an event and there was somebody sitting there trying to sell a co-branded Tier Two Miles card. You don’t have to get approved. You get a teddy bear if you fell out the app. It’s a teddy bear because grandparents are coming and going. They’re establishing their thing and they’re like, “No big deal to fill out an application if we don’t know better and I’ll give one of my grandkids the teddy bear.” They’re playing us at the airport to incentivize us to go after a credit instrument that isn’t the highest and most fundable credit instrument. It’s a Tier Two 80% co-branded card. That’s what they want to watch out for.
How many of you are around a decade ago when credit card companies were literally pelting college campuses with offers for credit? The credit bureaus and the lenders. Remember, credit bureaus will sell information to lenders. Every time there’s an inquiry, the credit bureaus make money for collecting that data. There was so much credit card debt and many people started out. The Millennials and the generation before started out with $5,000, $10,000, $20,000 in debt because they got approved at any time. Remember the previous insider secrets to the lender playbook. How he said that there’s $500 on the line and then they go out and lend $5,000 on that, the hypothecation of money.
They give it to a student, that student is going to charge it up in some way and they’re going to pay interest, probably enough interest to pay for the $500 if it goes into default. They had nothing to lose and it’s interest being charged on top of that. They prey upon the unknowing. I don’t want to say ignorant because the root word for ignorant is ignoring. That means you had a chance and you didn’t pay attention. You ignored it so that makes you ignorant. This is unknowing. This is unconscious. Many of you are completely unaware of what the motivations are.
They’re preying on the young and getting college-age students and/or barely adults. Do you realize it was bad that the consumer advocates of which we’re one of them, went to Capitol Hill and said, “You’ve got to stop this?” Technically, there is a law in place that a child, an adult that is over eighteen but under 21, must have her parental permission to get a credit instrument. I had to do that with my daughters when we started theirs. Congress had to step in to stop this blasting of students getting into debt.
That has traded from getting into debt here to getting into debt with student loans. If we don’t know the rules of the game, we’re going to get played. One of the other things that is part of their end game, what bureaus are looking for and supported by cardholder agreements from lenders. Remember, it’s a symbiotic relationship. I’ve talked about this before, but you’ve got to know not the day your payment is due, but the time it’s due. They may say that it’s due by 2:00 PM Eastern Time and your payment is technically late unless you pay it by 2:00 PM Eastern Time.
In California, that 11:00 is early in the morning to make sure you’re paying your bills, but you’ve got to know what’s in your cardholder agreement. That’s one example. When I got my last cardholder agreement, I went through that and line by line. I highlighted it and I shared it with you as part of a show. Be aware of the fine print. The insider secrets to the credit bureau playbook is that they want to sell data to you or to the lenders about you. One of the greatest ways that we’ve talked about before is opting out of the credit bureau databases. If they can’t send a lender pre-screened information about you, the lender is looking to go, “That person might be great for my card.” Get off those databases.
I always opt-out for five years so that I can know what my personal borrower identity is in five years and I’ve tweaked it and taken care of it. Opt-out and then set a calendar date five years from now. This is a gnarly process. Another thing the credit bureaus are notorious for, you’ve got to know this if you have the life experience of going through a divorce. First of all, lenders do not honor divorce decrees, not even a court order, for example, because a court order can’t get in the way of a contractual relationship. When you sign for your credit card, you create a contract. If it says, “I will repay this.” If your spouse signs that and you have a joint account, you’re both individually and severally responsible.
When you go to a divorce court and you’re negotiating, the judge says, “Mr. Smith, you’re responsible for the Visa and Mrs. Smith, you’re responsible for the MasterCard.” Both of you signed on both of them. Mr. Smith doesn’t pay his even if the judge said, “He’s responsible.” If Mr. Smith missed his payment, it shows up as a derogatory count on Mrs. Smith and vice versa. You can ruin each other’s credit because you don’t think you’re responsible because the judge assigned it to your spouse. That has never been the case and it is not the case.
We’re doing a way deeper dive into the dynamics of handling divorce and staying fundable through many life traumas. Divorce being one of them. Lenders do not honor divorce decrees and there is no such thing as a couple credit report. Let me reframe this, just because you get a mortgage and your name and your spouse’s name is on that credit report, it does not mean it’s a couple’s credit report. They do not keep joint information. You have yours. He or she has his and they’re completely separate. The mortgage credit reporting, what’s called a pass-through bureau, merges those separate files and brings them together into one piece of paper.
It’s the same thing that happens. FICO offers a family credit report. It’s two separate files that are being merged on paper or on a PDF. You do not have a joint credit profile. Don’t buy the marketing. They’re separate being conjoined. That’s why we inspire our students and clients, all you readers out there to have completely separate credit profiles, borrower profiles from your spouse or partners or otherwise. The other thing you’ve got to be careful of is the credit bureaus would rather be inclusive than exclusive.
What I mean by that is you will notice I’ve had to work this out because I share the exact same name as my dad. He’s not a senior and I’m not a junior, but we have the exact same name. Many times, until I had specified specifically my PBID, my Personal Borrower Identity separate from my dad’s because I helped him establish his. Our files have never been merged since because when I say bulletproof PBID, I’m talking about near bulletproof. If you haven’t arranged your personal borrower identity, you’re going to run into other John Smiths and other Mary Tailors whose identifying data may bring accounts onto your profiles that are not yours.
They’re going to cast a wide net and get everything in there even if it’s not yours. That’s how the system works. You have got to spend your time and energy cleaning it up and making a personal borrower identity bulletproof. If you don’t, you’re going to end up having more problems and become less fundable over time. I want you to know that you have power over your data. The bureaus collect it and sell it. FICO grades it and lenders use it to give you approvals, but it’s your data. You get to be in charge. I’m doing everything I can to empower you to be in charge of taking control of your data so that you have the inside scoop on what credit bureaus are like, what their motivations are, how they make their money. I love that you are with me.
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