How do we fix our credit scoring system?
Feb 22, 2022
Episode 605

How do we fix our credit scoring system?

Our data-based credit system was meant to be free of prejudice. It's not.

Credit scores are supposed to indicate how likely it is that someone will pay back money they borrowed. And credit scores matter — a lot. If you want to participate fully in this economy, you’ll probably need credit to buy a car or get housing and, in some cases, even to get a job. And yet, the current credit scoring system leaves lots of people out in the cold. About 26 million Americans are considered “credit invisible,” meaning they have no credit history.

“Anything that starts with good intentions, but that doesn’t have a whole lot of public accountability around it, will go off the rails,” said Frederick Wherry, professor of sociology at Princeton and director of the Dignity and Debt Network.

Today’s credit scores were designed to make lending more fair by using data to determine who should have access to credit. But there’s still lots of inequity baked into the system.

On the show today, we delve into the mystery behind credit scoring and why some people think it’s time to rethink how we measure creditworthiness.

In the news fix, the cargo ship traffic jamming ports off the coast of California seems to be easing. At the same time, a truck convoy like the one that snarled the border between the U.S. and Canada is headed to the nation’s capital and could disrupt traffic in D.C.’s Capital Beltway.

Later, a listener offers advice for those of you worried about an MLB lockout this spring, and an answer to the Make Me Smart question that’ll have you rethinking the power of being right.

Share how your credit score has affected you with our sister show, “Marketplace Tech.”

There’s still time: Sign up for the “Make Me Smart” newsletter (or any other Marketplace newsletter) by Feb. 28 and be entered to win a signed “Vintage Kai” T-shirt.

Here’s everything we talked about today:

Make Me Smart February 22, 2022 transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kai Ryssdal: Is that what you call it, the “go” button? Is that the technical audio engineering term, Charlton Thorp. Hey, everybody, I’m calling Kai Ryssdal. Welcome to Make Me Smart. None of us is as smart as all of us is what we say on this podcast.

Kimberly Adams: And I’m Kimberly Adams, it’s Tuesday, which means it’s time to dive deep into a single topic. And today we are going to talk about you can love him or hate ’em, but we need them I guess maybe: credit scores. Credit scores matter so much to participate in this economy. If you need a loan for a car or a house, you need credit. If you want to build your wealth over time, you need credit. And apparently nowadays, if you want to apply for a job, in some instances, employers check your credit report.

Kai Ryssdal: Yeah, and we’re gonna get to that part of it. But the basic, the basic thing is that credit scores are supposed to assess whether you can repay a loan you have taken out on time. The challenge, of course, is that that’s not how they’re used today, as Kimberly alluded to, they’re used for a bunch of other things. They’re a little bit opaque, shall we say. And there are a bunch of people in this economy who need credit scores, who can’t get them who the credit score enterprise and industry just does not see. So we’re gonna talk about how they work, how they’re supposed to work. And where we might go from here. Frederick Wherry is a professor of sociology at Princeton University, also the Director of the Dignity and Debt network. Professor, welcome to the podcast.

Frederick Wherry: Happy to be here.

Kai Ryssdal: So in an ideal world, how should the credit scoring apparatus work?

Frederick Wherry: Well, in an ideal world, we would expect people who are deserving of credit to be able to access it. But we would also expect that areas in their life, that credit has really nothing to do with that they would be free from its its controls. And so you’ve talked about this earlier, but one would expect that if you’re good at your job, and you’re going up for a promotion, you shouldn’t have to rely on a credit check for you to get that promotion, it should be based on your work performance. But that’s not what we’re seeing. And if you can afford to rent an apartment in a good neighborhood, but you just don’t have the kinds of credit history that allow you to have a score. But you can prove that you can rent that apartment, you should be able to rent that apartment, you should be able to live where you want to live so long as you can afford it.

Kimberly Adams: Yeah, and I guess, prove is is the key question here. Because like, what does that even mean? How did we get the system that we have now? Because we’re talking about, you know, you can show that you have the money up front, but what a lot of these lenders are looking for is proof that you’re reliable or credit worthy. How did we end up here?

Frederick Wherry: We ended up here with a lot of good intentions. And so what we wanted to do was to move away from this area of judgment and prejudice, and just really base our decisions on sort of the cold, hard facts. And so if you think about the, in the 1970s, we’re having hearings in the Senate about you know, what’s fair, for when you’re extending credit. And you get someone like William Fair, who is known for the FICO score. And the FICO score wasn’t out yet. It would come out a decade later. But he shows up and he says look more information is better. And if you can expand the amount of information that credit scoring agencies and credit reporting agencies have, then you’re able to let people who are deserving of opportunity, who are much lower risk than we think they are. You’re letting those people have access to opportunity. Now the hard thing is that any anything that starts with good intentions, but that doesn’t have a whole lot of public accountability around it, will go off the rails. And so you then moved from this technology that was supposed to grant people opportunities and to being a situation in which there was no exit so you can’t choose not to participate in credit scoring. If you want to get ahead you can’t be in the society and say, “Look, I really don’t think that I want to have anything to do with these credit credit. scoring agencies, I should be free of them.” If you want to be free of them, you will also be free of opportunity.

Kai Ryssdal: And also, just to continue with the whole, it’s sort of a catch 22 thing, you can’t really get a credit score until you can establish credit, and you can’t really establish credit without a credit score, right?

Frederick Wherry: Yes, so you can’t establish credit. So, so you so you can establish some small lines of credit. And as you as you build up those lines of credit over time, then you become scorable. Now, the difficulty here is that, in some communities, the kinds of opportunities you have for building up those smaller lines of credit for getting started, are going to differ by virtue of where you live. And we’re going to see differences by race, ethnicity, and immigration status. The other thing that we’re going to see is that if you are a child, and you happen to have immigrant parents who have relied on you to help them navigate the system and relied on your social security number, so that you could get some small lines of credit, then you’ve got some teenagers out, there young adults, whose credit histories look really bizarre. And so even though they have now sort of gone to college, and they’re now ready for new opportunities, they’re being judged by virtue of the immigration status of their parents and obligations that they may have had to have taken on, as, you know, one of the few people in their household who would have had access to more formal lines of credit, and so you have a lot of situations in which people who want to do the right thing and get themselves scored, just won’t have the same opportunity to do so.

Kimberly Adams: Wow, that’s a really interesting example of when a credit score wouldn’t really reflect someone’s credit worthiness. More broadly what do we know about how accurate credit scores are in making these predictions about this key question of whether or not somebody is going to repay a debt?

Frederick Wherry: Yes. So I mean, they do a pretty good job, to the extent that the information that they have about that person is accurate. Now, the place where they don’t do such a great job is you’ll have people who write into the Consumer Financial Protection Bureau, and they will say things like, “that is my father, that’s not me, we have the same name,” or that is, “I don’t know who this person is, I’ve never been to these places and taken out these lines of credit.” And so you, you also have people who, for whom there are mistakes on their on their credit reports, they find it very difficult to get the mistakes corrected. And they don’t feel as if there’s any public accountability for, for something that’s so consequential for their lives.

Kai Ryssdal: Okay, so look, if the head of the Consumer Financial Protection Bureau, just because that’s the one I thought of when I was trying to think of who might be in charge of this, but that’s a whole different conversation. But if if somebody in a position responsibility over credit score’s called you up and said, “Professor Wherry, we are going to blow this entire thing up, what ought we do to replace it?” What would you tell ’em?

Frederick Wherry: First of all, we need some public accountability. Now, does that mean that we need sort of a public option score? Perhaps we do. But if we do that, what we need to think about is just as we have a UPS and FedEx, we can have a sort of a publicly-provided score and an agency that is really transparent about how that score has come about, that competes with the existing scores. But then you would need to make sure that the private providers of credit scores are able to justify why they might rank someone sort of considerably lower than than you have as the public ranker. And in that way, I think it it it pushes everyone to do a better job at getting information  right. But it also puts some guardrails for consumers and says there is public accountability. And if the private providers of these scores is going to rank you so low, that you have really limited opportunity, then they’re really going to have to justify why they’ve done that.

Kimberly Adams: It feels like this weird conflict because, in some ways, if these people coming up with your credit score, knew more about you and your situation, you might get a better score. But then you’re kind of being forced to turn over more information about your life to get access to this. I mean, what kind of data is really fair to use when judging credit? worthiness and like, why? Why do we have to give it up?

Frederick Wherry: Well, I think we should ask consumers and citizens what they think is fair. And and some researchers have started doing this. So there’s a sociologist out at Stanford, Barbara Kiviat who’s done a nationally representative survey to ask folks, you know, what types of data are fair or unfair to use. And I think for most people, they just think that things like their posts and their likes on social media, or who their friends are, should be off limits. They think that what they buy at the grocery store, their tastes in food should be off limits, the kinds of websites they visit, they think should be off limits. So there’s a, there’s a sense that, yes, we’re willing to give up information that’s relevant to our financial behaviors, and the kinds of products and services we’re trying to access. But there are things in our lives that we think really should just, you know, take them out of the equation, because what you’re doing is you’re making a judgment about taste. And you’re making a judgment about can you have friends and relatives who are sort of having a hard time. And the other thing that you’re doing is you’re pretending that sort of history never happened. And so you know, if you have more relatives who are having a hard time and more friends who have lower credit scores, that may have a lot more to do with the history of race and racism in our country. And the kinds of opportunities that your parents and grandparents could not access, then it has to do with reliability, or sort of whether or not someone can be trusted. And so I think we have to move back to a common sense understanding of what’s fair, and making sure that the state is there to enforce those common sense understandings.

Kai Ryssdal: So what’s your I mean, spitball this one for me? Right? Because the idea of this country right now getting back to a common sense of I don’t know, whether it’s Tuesday. Seems seems you know, troubling.

Kimberly Adams: Today, special Tuesday.

Kai Ryssdal: It’s Tuesday. Yes.

Frederick Wherry: Yes. Yeah, it’s two. Yeah. So it’s funny though, whenever you start talking about money, people start thinking more in a sort of mathematical frame of mind. So as soon as you start talking about money, suddenly, they want to get logical, at least for a minute. And when you start thinking about sort of those instances in which someone’s hard earned money was taken away, unfairly, people kind of that they understand that they can get behind no matter their sort of political persuasion. And so I think one of the problems is that sometimes we go so far into the stratosphere of why these questions are really important for our understandings of membership and inclusion, that we forget about the common notions of, if that belongs to you, then people, no one should be able to come and just grab it and take it away. And what we’re seeing, I think, with credit scoring is there’s a sense that, suddenly, you’re either taking something away from someone, or you’re making that person pay much more for the same thing that that someone else is paid for. And so, and so I think and you know, and I may be naive, and I’m okay with that. But I think most people still have a pretty common and shared understanding about fairness, and about treating everyone the same. And even people that I disagree with politically, they, when we do disagree about questions of equity, they do come down on the side of everyone should be treated the same. But their version of everyone being treated the same is we’re going to pretend that history never never happened. And so I think that’s the other part of this.

Kimberly Adams: Frederick Wherry is a professor of sociology at Princeton and Director of the Dignity and Debt Network. Thank you so much, professor.

Frederick Wherry: Thank you.

Kai Ryssdal: Yeah, it’s it’s, it’s uh, you know, it’s funny, right? Because credit scores get all bogged down and bureaucracy into I have to deal with this and blah, blah, blah. And the shorter answer is, yes, you do. And they matter immensely. So pay attention, you know.

Kimberly Adams: Yeah, I mean, you know that I’m so obsessed with this topic. I was very excited when Marissa brought it up to do it on the show. Because we are also working on a series on the Marketplace Tech show about this, and credit scores and what works and sort of this, this black box algorithm and what goes into it and how it shapes so much of your life and what we know about it and what we don’t. So anyway, if anybody wants to help us out with this series, we’ve got a call out page for people’s stories about credit scores and how they affect you and whether or not folks think it’s time to get rid of them. Or if it works well for you. If you’ve got a horror story or a great story you want to share, you can either call us for make me smart at 508-827-6278, also known as 508-UB-SMART. You can also leave us a voice memo at, or on the Show page, we’re going to have a link to that call out page for the series that we’re doing for Marketplace Tech. Kai, you’ve heard me guys write about the vagaries of trying to manipulate my credit score myself. And it’s like, I feel like we all bend our lives into different shapes in service of this number that we know so little about,

Kai Ryssdal: And which is foisted upon us. It’s fact. Totally true. Yeah. All right, we’ll be right back.

Kimberly Adams: Alright.

Kimberly Adams: Okay, time for the news fix. I mean, there’s one.

Kai Ryssdal: There is one, there is one. Yeah. And I don’t you know, I hesitated even putting it in there. Because obviously, it’s the story. And that will be the story for a while I fear.

Kimberly Adams: So we’re talking about Russia and Ukraine. And um…

Kai Ryssdal: I love how you thought we had to actually say what it was like, come one.

Kimberly Adams: You know, what everybody…

Kai Ryssdal: That’s true. That’s true. That’s true. That’s fair. All right.

Kimberly Adams: Checking in with some of my family members over the last couple of days. And friends who a lot of people tune out the news and the day-to-day and the build up of this has been kind of iffy. In that, if you don’t  –  if you’re not paying attention to the news coming out of Washington on a regular basis, you might have missed it up until very recently, even though this was very clearly telegraphed by the administration that this was coming. So yes, we’re talking about Russia effectively already invading Ukraine. But whether or not the Biden administration wants to call it a full invasion yet is is what’s being debated. Who knows, maybe that’ll have been resolved. By the time folks are listening to this podcast. New sanctions coming from the Biden administration, new sanctions coming from European, other European countries, Germany, putting the Nord Stream 2 on pause. This gas pipeline, it’s moving very quickly, but you know, we were last time you and I talked, we were talking about the threat of a land war in Europe and I guess, potentially here we go.

Kai Ryssdal: We still are. Yeah, it’s kind of wild. Okay. Other than that, I do just want to point out a glimmer of hope on the supply chain front. We’ve been doing a bunch of reporting, obviously on Marketplace about the container ships down in Puerto Los Angeles, Long Beach 40% of the containerized cargo that comes in the United States comes through there and the backup there has been well publicized. I am here to report area of sunshine, if I could, their latest data shows that 77 ships are backed up and waiting to get into the port of Long Beach and Los Angeles. Now, you will say that sounds like auto ships, Kai and it is, but six weeks ago, six weeks ago, it was 109 ships. So the trend line is going the right way. And I would just like to point that out that there there may be an end in sight to the whole supply demand imbalance in this economy. We’ll see.

Kimberly Adams: You have a very elaborate in chart document here.

Kai Ryssdal: That’s why I gave you the headlines. So Maria Hollenhorst, the one of the producers on the afternoon show who went down with me to the port about two three months ago. And we did some interviews down there. She, obviously as good reporters do, stay in contact with her people. And I asked her this morning what the backlog situation looks like. And she sent us this this graph, which we’ll put on the show page, which shows the incredible ramp up and then as you get to the ninth of January, the rollover in the number of ships waiting, and it’s you know, there’s just lots and lots and lots.

Kimberly Adams: It’s a pretty sharp decline.

Kai Ryssdal: Yeah, that’s good stuff. Good news. It’s good news.

Kimberly Adams: All right. Since you’re going local LA, I’m going to go local DC, which is …

Kai Ryssdal: Oh yeah this is wild.

Kimberly Adams: Apparently, we have our own trucker convoy coming our way. And there is a planned trucker convoy. So around Washington, DC, we have something called the Beltway, which is this highway system that circles around the Beltway, that’s where we get the inside the beltway terminology. And they basically want to shut it down, like a boa constrictor, as one of the organizers has said. And so now the DC government and police are getting ready for these potential disruptions. I mean, we don’t have as many people commuting in every day as we used to, but still quite a few people could potentially have their commutes disrupted. It looks like it’s going to happen tomorrow. And they have also asked the National Guard to be on standby and so this could potentially get interesting, let’s hope it stays peaceful. Obviously, people have their right to protest and seek redress from their government as as they will. But let’s hope it doesn’t cause anything similar to the last time a protest, organized by some of the similar people came came to town.

Kai Ryssdal: Yep, yep, yep. All right. Do the mailbag shall we?

Kimberly Adams: Yeah.

Kai Ryssdal: Alright, so lots of feedback on Sarah’s answer to the make me smart question last week about the ways that you can help the National Weather Service with its data collection. Here’s just one of them.

Dawn: Hi, Make Me Smart. This is Dawn from Tucson here, which is the very first UNESCO food city in the US. The city of gastronomy since 2015. I wanted to comment on Sarah’s comment on this Tuesday show regarding the National Weather Service on the ground volunteers. So awesome. And can we all just agree that their official title should be weather jockeys. Thanks for making us smart.

Kai Ryssdal: Sure we could. Sure we could. Weather jockeys.

Kimberly Adams: Absolutely. NOAH. Let’s do it. Weather jockeys.

Kai Ryssdal: How about that. That’d be awesome.

Kimberly Adams: So they’d be WJs instead of DJs.

Kai Ryssdal: Yes. There you go.

Kimberly Adams:Yeah, I like it. Okay. Listener Britt in Tulsa, Oklahoma, has a suggestion for anyone nervous about baseball season. “In response to Kai’s note on baseball season delay, I’d like to suggest college baseball or softball. Their seasons are underway on campuses near you right now. The talent on the field is legit. The passion from the players is unmatched and the atmosphere is outstanding. Check out college softball or baseball and you won’t be disappointed.” That’s a great idea.

Kai Ryssdal: Totally legit. Good point. Absolutely. For sure, Brit. Absolutely. Good deal. Good deal. All right. So we hear lots and lots from you all and one of the best ways to do that is to answer the Make Me Smart question for us. What is something you thought you knew but later found out you were wrong about it? Give it a thought. Send us your answer or 508-827-6278. Here is today’s listener answer to that question.

Christopher: This is Christopher from Cincinnati, Ohio and some thing I thought I knew, but later found out I was wrong about was being right. Growing up, I believed being right or truthful or honest about something was a shield. And that when the truth came out, there would be a reward or recognition or at least, you know, acknowledgement of that. But now that I’m over 40, I’ve come to realize that for the most part, that’s just not true.

Kai Ryssdal: Yeah, and here’s the other part of that. Sorry, I laugh but I’m guilty of that, certainly in my own household. And sometimes in my office, as I’m sure my colleagues will tell me, sometimes even when you’re right, just shut up, man and let things happen, will ya? Just honestly just shut up. And that’s self advice as much as anything else.

Kimberly Adams: Well, and it’s interesting because in some ways being right or truthful or factual, in our modern context can open you up to more abuse. And, you know, we talk about being on the right side of history and the folks who are often in that role, don’t necessarily live the easiest of lives. And so sometimes being right however you want to define that is actually the most challenging thing to do. So yeah, I like that a lot. Thanks, Christopher. So that’s it for us for today. Let us know what you thought about the show or those answers to the Make Me Smart question or of course you can submit your own

Kai Ryssdal: Tomorrow is a special edition of what do you want to know Wednesday inflation all the time just me answering your questions. Send them to us if you got ’em still although I think Bridget I don’t know I think we’ve got a bunch but you know if you got more inflation questions send ’em along, you know how to do that. Hm.

Kimberly Adams: Hm. Matching “hm’s”.

Kai Ryssdal: Yeah.

Kimberly Adams:  Make Me Smart is directed and produced by Marissa Cabrera. Our team also includes producer Marque Green. Ellen Rolfes writes our letter and our intern is Tiffany Bui.

Kai Ryssdal: Today’s program was engineered by Charlton Thorp. Bekah Wineman’s gonna mix it later Ben Tollidany and Daniel Ramirez composed our theme music, the senior producer is Bridget Bodnar. Donna Tam is director of on demand. Marketplace vice president and general manager of all things is Neil Scarbrough. I don’t know if he’s the general manager of all things.

Kimberly Adams:  Did you see that Twitter thread of the guy talking about the confirmation bias with the New York Times and Wordle?

Kai Ryssdal: Oh no, really?

Kimberly Adams: I’m gonna send it to you. It’s a perfect example of when being right just upsets people.

Kai Ryssdal: Yeah, just don’t just sometimes it’s better just not to be. Just keep your mouth shut.

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The team

Marissa Cabrera Senior Producer
Bridget Bodnar Senior Producer
Tony Wagner Digital Producer
Marque Greene Associate Producer