The High Cost of Bad Credit

Credit Lift Inc. founder Taqwanna...Eli Durst, The New York Times

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By Mya Frazier

June 7, 2023

Taqwanna asked the cashier if there was a plan for layaway when she went to Fry's Electronics, in Houston. Instead, the cashier handed her an application form for a credit card. She applied. She says, "It was declined instantly -- it was like No!" She says. "Denied, denied -- you know, it's not enough to have your credit." Clark, 30, was working as a port security guard. She performed on weekends as a rap artist in local clubs under the name T Baby. She wanted to use the camera to make music videos to promote her career. She thought, 'If I cannot afford a camera of $200, then I am in a bad situation with the credit thing.

Clark was plagued by money worries since childhood. Her family experienced extreme poverty in elementary school. On the verge of homelessness, her family lived in the framing of a house that her father was constructing on a lot owned by another member. Clark, in her early twenties, says that at the request of her mother, she co-signed an auto loan with a high interest rate on a Dodge Neon, for her younger siblings, who never paid off the loan. She made other mistakes, such as letting her boyfriend charge $2,000 to her T-Mobile bill. She couldn't pay the $4,000 to fix her car's transaxle, so she let the dealer repossess the vehicle. At the time, she didn't realize that the voluntary repossession of the car would add another debt to her record.

Clark was deflated by the denial from Fry's. In 2013, after she got married, she was desperate to own a house. Her husband and she, who worked at the Port of Houston loading and unloading steel pipe at $17 per hour, were worried about rising rents in their $800 a month apartment where they raised her daughter. Clark watched as her mother was lured by a low-interest rate to become a homeowner during the subprime mortgage boom. However, when the adjustable-rate mortgage ballooned, she lost her home due to foreclosure. Clark said, 'I did not want to do anything with the words variable or A.R.M. or nothing'. She was immediately denied preapproval for a fixed rate mortgage.

She saw her credit report for the first and only time then. The report was from one of many companies who sell mortgage lenders reports based on the data they buy from Experian Equifax TransUnion. The numbers were bleak: on the widely-used credit-scoring system, which ranges between 300 and 850, her two scores were in low 500s. Her third score was 700. She stared at it, confused. She says, 'I did not know that there were three companies with three different scores'. "I had no idea about any of it." She didn't also know what she could do.

Clark asked for her credit report from each of the three bureaus. Each keeps their own records. The bureaus are required to provide these reports to consumers free of charge once a calendar year since 2003. Her financial identity was on full display. Addresses, employment history and lines of credit were all there: missed payments, collections of debt, closed accounts, credit inquiries by prospective lenders, etc. Her insurance would not cover $4,552 in emergency dental care. She never paid $2,742 off a Chase credit cards. The long-standing T-Mobile bill she was so worried about had disappeared. The unpaid debt from the Dodge Neon, as well as her voluntary repossession were also removed.

Clark's most important information was not included in the free reports: her credit score, which is a numerical estimate of how likely a person is to repay a debt. She had to pay for those. She paid Equifax $19.95 per month for the subscription and received her scores one day in December 2014. Two of them were in the middle 500s. She recalls that they had a little "poor" underneath them.

Clark, who was a fan of hip-hop, R.&B and R.&B, had not paid much attention to the radio advertisements that she would hear on 97.9 The Box. The station, located in Houston promotes something called credit repair. She began searching online for credit help when she was worried about a rent increase. These items were being sold on Facebook for $20 each.

Credit scoring is a numerical reflection of America's economic and racial divides.

Clark was now familiar with dispute letters. She could write to the bureaus to challenge the accuracy of the entries on her report. If the bureaus couldn't verify something within 30 day, they were usually required to remove it from record. These books include sample letters. Clark selected the most simple template:

Please send me a letter to contest the following information that I have in my file. On the copy of the report that I received, I have circled all the items I disagree with.

This item [identify the item(s), disputed by source (such as tax court or creditors) and type of item (such as credit account, judgement, etc.] This item is [inaccurate] or [incomplete] because [describe the inaccurate or incomplete information and why]. I request that the item [or another specific change] be removed to correct the information.

I have enclosed copies of [use the sentence below if appropriate and describe any enclosed documents, such as payment records or court documents] that support my position. Please [delete or rectify] any disputed items as soon as you can.

Clark understood now that the best thing she could do to fix her credit score was to have 'deletions'. She could raise her credit score if she removed enough negative items from her report -- such as a late payment or a debt.

Clark wrote a series of handwritten letters over the next two years. She was surprised to find that she had made some deletions. The unpaid dental bill, the balance on her Chase credit card, and the $110 owed to West Bay Acquisitions (a collection agency) for $110 of charges from Black Expressions - a bookclub she paid $1 to join, but forgot to cancel. She felt a little uneasy at times. She was not making good on her debts. She says that paying the debt would have been the right thing to do. She learned that, even if they were paid, they would still appear on her reports because they had been sold to an agency for collection. If it will still be here, then what's the use?

The deletions were not enough. Clark needed positive tradelines to raise her credit score and qualify for a home loan. Tradelines, in the argot used by credit bureaus to describe all accounts on a report, include credit cards, mortgages and loans. The e-books contained a long list of secured credit cards that could be used to quickly add tradelines. People with low credit ratings pay hundreds of dollars in security deposits to obtain these cards. Clark's credit score rose by taking out additional cards. She now qualifies for a mortgage with a fixed interest rate and zero down payment. Clark and her husband purchased a house in Sunnyside in southeast Houston, a predominantly Black neighborhood. The home cost them just over $150,000.

Clark became a passionate advocate of credit repair. "I was running like a little Hummingbird -- Hey, I know credit!" She says. She started conversations with Black women living in her neighborhood, and even shared her phone number. 'The young women working at H.E.B., and mothers who were catching the bus, I said, Let me explain credit to you, I will fix your credit free of charge.'

Clark, a self-described 'credit expert', opened Credit Lift Inc. in 2021. She charged fees for enrollment ranging between $159 and $318 per couple and a monthly subscription fee ranging between $120.99 and $201.98. She says that when people pay for something, they are more attentive. Clark started holding sessions over the phone or Zoom with clients to collect these fees. She reviewed each negative item in their reports. Sometimes clients became emotional. Debts can be a reminder of hard times, such as a job loss, divorce or a period in which the client was homeless. She would then handle the difficult task of sending them dispute letters. She only charged after the first round and issued refunds in case they did not result in deletions.

Clark joined the credit repair industry by starting Credit Lift. According to a recent estimate of the market, last year's revenues were $4.4 billion. This is up from $3 billion. Many Americans do not know about this industry, despite its size. The burdens of credit are based on race and class, which is why many Americans don't even know it exists. Payment delinquencies for credit cards, auto loans, and mortgages are double as common in low-income areas. These all lower credit scores. In a report released by the Federal Reserve last year, only 11 percent (of applicants with incomes above $100,000) said that they had been denied credit or approved for less credit than what they requested. Among those with incomes under $50,000, 60 percent of Black and 43 percent of White applicants were refused credit. Black consumers are more likely to be denied credit than whites, regardless of their income level.

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This industry has grown rapidly due to the volume of denied credit reports and the complexity of the credit reporting system, which forces many people to ask for help. In the United States alone, there are an estimated 60,000 independent credit repair businesses. Many of these operate remotely. Clark works from a home-based office. Some large firms have been able to create a national footprint, by creating networks of multilevel marketing agents. Others by selling software that includes dashboards that analyze client credit reports, or automates the process of writing disputes letters.

Scammers and bad actors have also benefited from the size and depth of this industry. Their stories are occasionally reported in the media. Pastor who solicited online credit-repair customers with his family and friends only to run up credit card charges in their name and rack up millions of dollars in debt. Credit-repair network which operated as a pyramid by recruiting almost half a million agents - mostly via social media - with come-ons such as, "Who needs negative items permanently removed from their credit reports ???'?" Credit-washing frauds, where credit-repair agents falsely report identity theft to the police, and then, without their clients' knowledge, use the police reports with dispute letters in order to remove the negative items from the client's credit report.

Clark knew about scams such as these. She had sent her own dispute letter as a debtor to avoid them. She wondered sometimes what the real scam was. Money was being sloshed around - and the majority of it went to credit bureaus. Lenders and creditors, as well as collection agencies, paid money to the bureaus to send negative and positive data. They then paid again to receive the same data. The bureaus would give consumers one free report each year. However, they had to pay to access the scores that the bureaus tabulated. Clark said, 'They're selling back our information to us.' 'They're geniuses.'

Credit scores are a major factor in determining who can live the good life. Credit scores above 700 can open up a whole new world of opportunities, including low-interest auto loans, mortgage refinancing offers, easier hiring processes with employers and the ability to never have to explain a difficult period in order to get an apartment. A score of less than 659 may have costly consequences. In some states, landlords and employers can reject applicants with poor credit. Some auto insurers will charge up to 156 percent higher yearly premiums. Auto lenders may impose double-digit rates.

The credit score as we know today didn't exist until 1989. Fair, Isaac & Company, a data-analytics firm in San Rafael, Calif., launched the widely-used scoring system, FICO, that bears its creator's name. The credit score has become so common that children are able to get a mock credit score from the app Kiddie Kredit. This app, developed in partnership with Equifax claims to promote financial literacy. Credit Karma and Credit Sesame, as well as Experian Boost, have been promoting the self-improvement gospel in recent years. They are products that track your credit score and attempt to manipulate it, like you would cholesterol levels or steps.

The algorithms that are used to calculate the three-digit distillation are kept secret. They are actually trade secrets and are constantly revised. It's not even possible to have a single scoring method anymore. Experian Equifax TransUnion -- The Big 3 -- introduced VantageScore in 2006 to compete with FICO. Morningstar analyst describes the Big 3 bureaus as having a competitive advantage in the credit system that is comparable to having "wide moats" that are "impervious". The bureaus' main source of revenue, which is $15 billion, comes from corporations who pay fees to gain access to the repositories. Every year, potential lenders pull a consumer's record to check their credit. These 'pulls' are in the billions.

The confusion created by competing reports and scores has led to a confusing landscape. Each bureau has a slightly different version of the consumer's credit history. We have many credit scores and not just one. There are dozens of reports available, not only three.

Consumer Reports' investigation in 2021 suggests that the system is so susceptible to error, that some aspects of it 'appear' to be faulty.