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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.
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