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Article by Mohan Babu


Credit History: Complex systems for a simple life

Almost all financial transactions in the US between individuals and banks are tracked, monitored and recorded. This record is known as a “credit history” and the key to tie every person’s transaction is the Social Security Number, says Mohan Babu

Banking and financial systems in the US are quite different from those in India. Just think, what would it take for you to walk into a bank and ask them for a credit card or car loan, perhaps amongst the most basic of necessities in the US? Most Indians, even those who have been working for reputable organisations for years would find the prospect of going to a banker quite daunting. Of course, most of us would probably have to use some ‘contacts’ i.e. call up an uncle or cousin who knows someone remotely associated with a bank or financial institution. Of course there is a method in the madness there. Banks, like all prudent financial institutions like to safeguard their investments. The bank manager or loan officer relies on the referral you provide him or her. This system is quite different from what we have in the US.

Out here, almost all financial transactions between individuals and banks are tracked, monitored and recorded. This record is known as a “credit history” and the key to tie every person’s transaction is the Social Security Number (SSN). Every person in the US, including legal aliens on H1 work visas are given a SSN. The purpose of this number is to track the social security (retirement) payments that individuals and companies make. Of course, apart from credit rating agencies, this nine-digit number is also used by the Internal Revenue Service, (IRS) the Federal Income Tax tracking body to track the tax compliance of every resident.

The SSN is the key which is used by the three major credit rating agencies in the US - Equifax, Experian and xxxxxx, who uniquely identify, record and report every individual financial transaction including debts, credits, bankruptcies, loans, mortgages, court decisions etc. Complex IT systems, networks and powerful mainframes are constantly at work churning through millions of transactions in order to provide a meaningful analysis and decision making tool that almost every banker and financial decision maker in the US uses. All the three credit rating agencies in the US constantly share data between their systems to get them to be in sync.

The process of gathering the data is quite straightforward. When a person, say Mr. Shetty moves to the US and acquires a SSN, among the first things he does is to open a bank account. If he applies for a credit card, the banker checks for his credit report, which obviously doesn’t exist. At this point, the banker, more often than not, rejects the application citing a lack of credit history. However, the story does not end there. Since the reporting agency’s system does not find an entry for the SSN being keyed on, it goes ahead and creates a new record for it (the SSN). Added to that, the enquiry, which was made, gets “recorded” in the agency’s system. As Mr. Shetty goes on with his life, applying for a car loan or another credit card or store charge card, his every new interaction with a financial institution gets recorded this way. A history of all such transactions, recorded by the systems managed by these credit bureaus can be summarised and is given to anyone authorised to look it up. Even individuals have a right to acquire a copy of their credit report and are encouraged to do so periodically.

Most Americans start their financial life quite early and their transactions get recorded over a period of time. They are quite paranoid about maintaining a good “credit history” since a clean credit report is a harbinger to getting favourable rates of interest when applying for credit cards or loans and mortgages. Of course, most Americans live on credit and some of them end up defaulting on credit card payments or other loans, which immediately reflects in a negative credit score. Personal bankruptcy has hit an all-time high, especially due to the run up that the economy saw during the past decade or so.

Indian professionals, especially those of us who land here for the first time find it extremely difficult to establish ourselves financially. The first time we walk into a bank or financial institution, we have to try extra hard to convince the banker that the lack of credit history does not mean that we are not willing to be financially prudent. Lots of traditional banks are extremely wary of opening an account for a person without any credit history.

I remember the first time I walked into a small bank in Frankfort, Kentucky where I was stationed. The lady in-charge of opening new accounts tried to pull-up my credit report from the system and on being told that I didn’t have one, got paranoid. I should have known better. Like most bankers in the US, she probably didn’t have an opportunity to deal with foreigners with a credit history. Later, I found an Indian colleague working in my office who was willing to provide a referral at his bank where they were used to dealing with Indians. He was only half-serious when he explained that a credit history in the US is even more consequential than a horoscope is in India.

Even after opening a bank account, a line of credit was out of question, hence the lady at the counter suggested that I open a ‘secured credit’ account. What I had to do was to deposit a specified sum of money and the bank was willing to give me a credit card for that sum. This way, as I continued to repay my bills every month, the credit rating agency would be notified and my credit history would be built over a period of time and pretty soon I would be able to get an unsecured line of credit. I have never had to look back since then. Now it is the credit card companies who are after my business and stuff my mailbox with unsolicited offers.

Five years after coming to know about ‘credit history’, it still does not cease to amaze me that the complex IT systems built and managed by credit rating agencies are able to accurately track almost all the financial transactions that individuals in the US happen to be involved with. The flip side is the ease with which these systems help felicitate the common-man’s interaction with banks and financial institutions.





About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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