Plea from an American with Bad Credit

This may come as a surprise, but my plea is not for fairer treatment. It is expected that when large financial concerns such as AIG and Goldman Sachs tank, the government shovels money into their coffers to protect the savings of the country. The willingness of these once-reputable giants to defraud each other of unfathomable sums and then to show up, hat in hand, at the taxpayer’s door is an old story, sickening, yet accurately predicted by many. As a citizen of our economy who has bad credit, it is not for me to point fingers.

What I suggest, though, is a thorough re-examination of what debt actually means in our economy. Here is something else which may surprise: despite my abysmal credit rating, I have (almost) no debt. My wife, whose student loan debt is five-figures, has excellent credit. This seeming paradox makes sense in a way; she borrows money and pays it back regularly, with interest. She is the kind of person to whom a bank would want to loan money, because through their loans to her, they are assured a profit.

On the other hand, given my history of not taking out very many loans and not always paying them back on time, I present a host of worrisome questions to lending institutions. Will they lose money floating my missed payments? Will they ever hear from me again after I get their money, or would they end up having to sell my bad debt to a collection agency for pennies on the dollar?

By now, most people have heard of the massive switch in our economic thinking that has led to the current crisis. Namely, lenders figured out that overextended borrowers were good for business, because they usually could only afford to pay the monthly minimum on their adjustable rate loans. This meant that the lenders could make a profit off the principal for decades. Then, if the debt went too far into the red, the lender could package the debt, misrepresent its risk (the fraud part of the equation) and sell it to another financial institution. Tick, tick, boom. At some point, that all comes due, and then multimillionaires show up at the federal treasury asking for a hand-out.

I think I’ve done a good job avoiding the consumer end of this mess by not having a credit card. I am fiscally conservative. If I don’t have money for something, I don’t like buying it. I got butterflies in my stomach when I took out the loan to buy my first car, not because of consumer excitement, but because of debt anxiety.

Here’s the funny part: a friend recently told me it was imperative that I get a credit card, because I am not building up a credit rating. Having a credit card is tantamount to signing a contract where one party can alter the terms of the agreement without notifying the other party. To me, that is economic insanity, and a big part of the reason we’re in the pickle we’re in now.

Like any loan request, my plea carries an explanation of circumstances. Here is the preamble: I paid back my car loan in its entirety. Occasionally, like many people in our economy, I missed a payment and doubled up on my next payment. I basically carried a balance on the loan. I incurred late fees. I ended up paying slightly more interest. But, the loan company got back every cent it spent on me, and made a profit from letting me use its money to purchase a car. The system worked.

My plea is that someone create a credit agency that makes a distinction between someone like myself and the bum who has a nearly identical credit rating to my own, the person who has thousands and thousands of dollars in outstanding debt that they will never pay off, which the lender will end up selling as bad debt.

Allow me to take you back to a simpler time, only decades ago, when more people borrowed from the local bank or general store than from some corporation hundreds of miles away. Typically, the lender and borrower knew each other, and it was not uncommon for some people to have a running tab at the local saloon or market. In these situations, businesses did well for themselves by making the simple distinction between people who couldn’t always pay and people who never paid.

I have a job. I buy things in the marketplace. Occasionally (though rarely), I borrow money to do so. You’d think some enterprising lending organization would court me and the millions of Americans just like me, who don’t mind carrying a little debt once in awhile – or paying for the privilege – but who don’t want to be raped in the pocketbook for missing a payment here or there. This lender would do really well by offering a loan product that allowed for some flexibility in repayment, with a reasonable and well-defined penalty. Americans are a mostly fair people. They well understand the concept of fault and penalty, but they are coming to understand that incurring double-digit interest for missing a single payment is usually not worth whatever they bought with the loan.

You’d think that getting money back with interest would be most important to a lending institution. In diving to the bottom of the credit market, American lenders have missed out on a huge pool of consumers who should be seen as moderate credit risks, but have been lumped in with the deadbeats. Those of us not drowning in debt are waiting for the chance to help get the economy moving again.