“Credit is Worthless, Pay Up” Consumers to FTC and Equifax

In the wake of the recent cyber security news from Equifax, another day and another data breach story to consumers, the settlement offer included three options for consumers affected in the breach. While consumers suffering identity theft as a result of the breach can apply for up to $20,000 for their efforts to resolve their credit issues, the rest of those affected but not so profoundly were given two options. The “big ticket” of 4 years of Equifax, Experian, and Transunion credit monitoring with another 6 years by Equifax, or $125. With $31 Million set aside, the settlement budgeted for up to 248,000 people to opt-out of the offered credit monitoring and take cash to pay for their own credit monitoring service instead.  

So confident that most consumers would opt for credit monitoring, they set aside money for less than 1% of those affected.  

What happened? 

An alternative that “obviously no one would want” is viewed as a real option. In many settlements there’s an alternative option to give consumers a feeling of choice in how they are being addressed and represented in the settlement. It’s the nutjob, weirdo, and eccentrics offer. It’s meant, through mere existence, to appease the people in the group who would otherwise feel they didn’t have any choice in the settlement. Ultimately, alternatives in settlements are a, to borrow a line from Eddie Izzard, “tea and cake, or death” situation. On one hand you have what seems like the obvious choice, on the other choosing death and then getting to take the tea and cake, then the tea and cake run out to an exclaim of, “so my option is ‘or death’,” at which other options are given. 

When “Or Death” Becomes “Tea and Cake” 

In marketing, it’s common to give consumers options, a lesser product and a better product so that consumers can engage with the product at a price and features point that best matches their needs. What has unfortunately happened is the invention of marketing in which a company sells a product that no one will buy or is a test drive, a product that you buy and will quickly trade up, essentially a null option for consumers. Companies, such as Apple, have been offering a flagship product and lesser versions of it, often so horribly featured as to be unwanted by the majority of consumers, and barely functional for those who find themselves unable to come up with the money to pay the premium for the flagship product. This false choice, one in which the consumer is given “choices” between a premium product that will fit their needs, and a host of lesser that fit nearly no one’s needs, creates an illusion that they are making a decision, much like the alternative that the Equifax provided.  

And in a spectacular backfire, there was an overwhelming number who chose “Or Death,” the lesser alternative that “obviously no one would want.” Credit monitoring ranges in price from around $10 to $30 per month, representing $480 to $1,440 worth of credit monitoring charges for 4 years. Yet, consumers find more value in a $125 payout. More than 248,000 people found $125, far more appealing than credit monitoring, but why? 

A Time Before Credit Bureaus and Scores 

Equifax, the oldest, formed in 1899 began collecting information about the lives of consumers, slowly accumulating data about spending and repayments, as well as a dearth of information about the lives of the consumers they held information on. In 1956 Fair, Issac, and Company began using this data to create what we know today as a FICO score, the number that each agency calculates in it’s own way to determine credit worthiness of consumers. While credit bureaus became prominent in our lives in the 1960s and 1970s, gleefully selling what they knew about us to anyone who came along, the credit score wouldn’t become meaningful until the end of the 1980s. Suddenly consumers who had long established relationships with the business who allowed them to pay in installments were suddenly finding themselves reduced to three digits. Today, 300 to 850, these numbers supposedly tell a business everything they need to know in order to decide how to conduct their business relationship with you as it results to credit. Yet, for many, these scores lend only to histories of exclusion, extortion, missed opportunities, and fear.  


Tools of the Rich Torture the Poor 

As soon as credit scores were made the standard of decision making in evaluating credit files and determining credit worthiness, many consumers were left with fewer options than they had previously had. Buying a car meant getting approved for a loan, and those three digits would determine everything from total loan amount to interest rate, and ultimate what kind of car they could afford, even if a change in finances said otherwise. While being over approved feels great, offered more than one needs at a rate less than average, the alternative can be devastating for households, and a humiliating situation to go through. Factor in the impersonal nature and inability to defend oneself against the score, plus the lowering of one’s score by seeking approval, many consumers became paralyzed by the thought of seeking credit approval altogether. Regardless of their score, the “what if” scenario in which you’re deemed unworthy or less worthy, shoved out the door or steered into a different purchase because you don’t qualify, became a serious deterrent to making purchases.  

Only one group of people never suffer in this calculation, those who can afford a purchase regardless of credit approval. In fact, their credit scores are ultimately bits of trivia that have no real value except for bragging rights. A gold seal of approval that denotes superior responsibility and integrity from someone who could have, ultimately, just paid cash to begin with. People who never had to worry about surviving the financial problems posed by the death of a spouse, loss of a job, or some other financial setback, get the highest scores, while everyone else is essentially some shade of “bad character.” 

But for those without who need to buy, alternatives were soon on their way. 

No Credit Check Needed 

In the wake of the credit score and traditional banking products that allowed business and personal spending to occur now and be paid off later becoming less favorable options for consumers, whole new ideas about offering installment payments and loans became popular. Payday lending, rent to own, pre-paid, to name a few began to give consumers a different way to handle buying the things they needed without fearing credit checks and security deposits derailing their purchases. From taglines like “No Credit Checks Needed,” “Guaranteed Approval,” and “Good Credit, Bad Credit, No Credit, You’re APPROVED” consumers gained a newfound confidence to buy.  

Without a credit check and guaranteed approval, consumers who either knew they didn’t have the credit score to be serviced, or those who didn’t want the hassle, found themselves taking the “lesser option” as a fact of life. Buy Here, Pay Here car lots rarely deal in new, offering consumers used vehicles for a premium with the only repercussion being repossession or disabling of the vehicle for non-payment. A bridge loan, collateral loan, or title loan used to be the typical way that those who knew they had money coming but wasn’t available to them yet would often resolve their “cash flow” problems. While many full-service banks would make these loans, many consumers found bad credit scores pushed them through the doors of businesses that explicitly offered these services.  

But what about the consumer that doesn’t own collateral but works for a living that has an expense now? Though many businesses used to make a portion of an employee’s paycheck available or loan money to employees who found themselves short in a crisis in the form of a payroll advance or a payroll deduction plan, many businesses have done away with this option. In the place of businesses providing those options to employees, payday lending came to the rescue. Again, a lesser option than consumers had, but a far better choice than losing one’s job, housing, electricity, heat, etc. Ultimately, these services start with the idea that their consumers won’t fulfill the obligation in part or in full and charge an exorbitant amount in the price of the product, finance charges, fees, and interest, etc. to cover those losses across all consumers. The ones who do pay out the obligation, pay enough to offset and make profitable lending to everyone, even those who have already failed to pay as agreed. While consumers balked at up-front security deposits and the attack on their responsible use of credit, “No Credit Check Needed” companies simply built it into the repayment plan.  

Prepaid services, the best example of which are cell phones, offered lesser phones, lesser service, but greater affordability and opportunity for consumers who didn’t have the credit score to pay up front for premium phones, bloated plans, and contend with enormous security deposits. Weary of the two year contract that ruled when a phone could be replaced, which usually far out-lived the life of the phone and the needs of the consumer using it, prepaid turned the disposable phone and refillable plan into a less is more option for consumers. Don’t like you’re phone, get another one for a few bucks. Need a bigger or smaller plan, change it next month or add on a new one now. Moving to a new area, switch to the best provider in that area.  


Less is More 

What we see with each of these lesser options is that while they may offer less to consumers, it’s usually enough for them to get by. The character of the 2010s is one of struggling to get by, living paycheck to paycheck, working as an independent contractor for micropayments, or full time freelancing in a feast or famine environment. All put consumers on edge, and make credit offers challenging if not impossible. With non-traditional employment with irregular payments, gapped employment histories, micropayments, and multiple revenue streams, consumers are looking for options, and less is more.  

Credit scores a centric to rigidity of the American Dream. Earning a fixed income or having a lump sum of available cash. Scores are generated around patterns that many modern workers don’t follow. Consumers are seeking a flexibility that traditional credit-based offers don’t allow. From travel bloggers to the self-employed one person business to small business with a few employees, and everyone in between, much of our ways of purchasing and the assumptions that credit-based offers make, are built around a rigid idea of steady employment, set incomes, and don’t account for ebbs and flows in income.  

With the erosion of the middle class through inflation and stagnant wages, consumers who still hold onto steady employment often find themselves unable to afford, unable to pay as agreed, and as a result unable to maintain good credit that would secure better financing. For many the ends don’t meet to start with, financial setbacks are common, and major expenses drive them deeper and deeper into debt.  

For those who seek a way out through the American Dream through entrepreneurship, following the classic idea of saving up, taking out a loan, and building a business, they too find themselves unable to secure the credit they need to make their businesses successful, often running out of money before they can gain a solid footing, even if they have impeccable credit.  

Lending, even when the score is great, doesn’t often rise to the financial needs that consumers have in a modern economy, and in many cases serve only to rob consumers blind of the resources they have while allowing them the “opportunity” to take on debt for a business dream that will ultimately turn into a business nightmare. Therein lies the rub of those looking to start a business and be their own boss, in many cases the best opportunities look nothing like the American Dream. Whether that’s the process to get there or the actual business itself, many businesses find success not through cashing out their life savings and borrowing the rest, but instead start with nothing but a few dollars that they keep reinvesting, while taking advantage of the internet to build their presence while never owning or renting a physical location. 

From My Garage to Yours, With Love 

The garage-based business was once the lore of Sillicon Valley specifically and the exception to the rule for how success in business was born. Inspirational tales of a good idea, a garage, blood, sweat, tears, perseverance, a few bucks, and never giving up until one day someone sees the value of the thing you’ve poured yourself into. The inspirational part was that one day all the sparks would lead to a fireworks show of financial success. Today, while the dream of hitting it big may still exist, the reality is many businesses will forever be relegated to the garage, storage shed, closets, and guest rooms. Many others will never take up more physical space than a spare bedroom turned office or a laptop and camera bag. Less is more, or less than we’ve come to see as a legitimate business, is now doing more business than ever. While those still chasing the dream may fail, those who have leaned into the harsh reality of what an economy without a middle class is have found a way to get by without being chained to traditional employment, able to afford more than their recent ancestors by exploring an existence not tied to credit.  

Why $125 Is More than $480 

With all of this said about the new nature of the working person, $125 in hand is worth so much more than credit monitoring ever could be. While it may seem paultry to people who make that much in 15 minutes or less, to the working poor a $125 windfall can be turned into something, even if it’s just one less bill, whereas $480 in credit monitoring is virtually meaningless. Credit monitoring, and the fraud that it can prevent, is only a concern of those who have something to lose as a result of their credit being harmed. Shiny new cars (especially leased versus owned), buying a dream home, renting an upscale apartment with a breath-taking view, all the way down to getting a flagship phone on a post-paid plan with all the bells and whistles, for example, are things that many consumers have no longer have a use for. Functional, affordable, flexible. Those are the key descriptors for how those below middle class live. Everything else is feast or famine. When the money is tight, you look for bargains and live off what you set aside when the money was good. When the money is good, you stock up for the future and party with the rest. When you’ve exhausted the money and the set aside, you make do any which way you can. It’s not the new American Dream, it’s the new American Reality for the majority of people. Make do, do without, get by any way you can, avoid credit, and look for the best option with the least commitments.  

And in that situation, $125 can open doors that an 850-credit score never would have. It’s a payment on a refrigerator from a rent-to-own; it’s a couple months on a pre-paid cell phone critical to your phone-based business; it’s an opportunity to buy raw materials, used equipment, software, or other resources that you can in turn make more money with by offering additional products or services; it’s a fancy date night or a few nights in a cheap hotel that allow a stressed out couple to reconnect and salvage their relationship; it’s a new pair of glasses that help you see better and work better; it’s and endless array of things to people who are struggling to make ends meet and survive. 

But that option was capped at $31 million by rich men making decisions that affect a massive group of poor people who never conceived of a life in which $125 was worth more than their credit score. 

Posted in Joe's Writing.