This is the full transcript for season 4, episode 9 of the Quartz Obsession podcast on credit scores.
Listen on: Apple Podcasts | Spotify | Google | Stitcher
Nalis: Ten years ago, I moved to the US. I landed in New York City on a freezing day with a green card I had won in the lottery—for real!—and a lot of great expectations. But no credit score.
I could not get a credit card. I could not rent an apartment. I could not get a phone line. I didn’t have any debt (I love you, free European education), but that didn’t help! In fact, at some point, an Ivy League institution I will not name tried to convince me that going tens of thousands of dollars in debt to attend will help my credit. And the craziest thing is they were right!
Welcome to America, where you need to go into debt and pay you back before you can be seen as a real person. It’s totally bizarre, but your credit score is almost a trait of your personality, like it’s showing you were raised right. I remember I had a roommate at one point who, after a decade of horrible New York dates, told me she had dropped her requirements for a potential partner to “somebody who breathes and has a good credit score.”
It’s all very confusing. What even is this number? Who came up with it? How did it come to be a stand-in for someone’s financial reliability, and how does the rest of the world decide who’s worthy of credit?
G/O Media may get a commission
I’m Annalisa Merelli, Nalis for short, and I’m the host of this season of the Quartz Obsession podcast. Today, credit scores.
Ready to obsess with me is Scott Nover, a reporter at Quartz who has spent a bit of time looking into the cabala of credit scores. Welcome, Scott.
Scott: Thank you so much for having me.
Nalis: Scott, how’s your credit?
Scott: It’s good! It’s not perfect, but it’s good. I’m not really sure what I could be doing differently, and I think that’s part of the mystery and intrigue of credit scores is, how do you get an 850 credit score? Like what goes into that?
Nalis: I know it keeps me up at night, like I’m like, how do I max this? Do people get a credit score when they become adults or is it before, like can you, say, like, drive without a credit score? Can you buy a gun without a credit score? Like when did this thing happen in a person’s life.
What is a credit score and how do you get it?
Scott: So it’s not anything that a US adult gets when they turn 18 or turn 19, but it’s usually something that they pick up as they pick up student loans or a credit card or a car loan, or eventually a mortgage.
So it’s possible to never have a credit score. If you’ve never interacted with the US credit system, if you’ve never had a credit card, if you pay things in cash, if you haven’t taken out a mortgage or a car loan or anything like that, it’s possible that you have no credit score that way as well. And that can be a huge problem for people trying to build credit and eventually make one of those big purchases that is financed by a loan.
Nalis: It’s interesting to me how credit scores get built. Like, if you grew up in the US, presumably you are given several opportunities to enter the system early in life, even if you didn’t have a credit score before. But then as you age, those opportunities become fewer and fewer.
Scott: Right. And you don’t want to apply for a credit card that you can’t qualify for, because that could hurt your credit further.
There’s all these, kind of, strange calculations that go into, like, how do you even start getting into the credit system if you don’t have those built-in loans already? One of those ways is getting a, you know, quote unquote “starter credit card” and then building your way up and the system incentivizes having lots of credit cards and lots of different loans and loans of different types and a certain amount of debt in order to pay it back.
And so it’s a confusing system to wrap your head around as someone coming of age in the financial system.
Nalis: Can people have a zero credit score?
What is the lowest possible credit score?
Scott: So, the lowest is 300. I don’t know what you would have to do to go anywhere near that, but you would probably be in…
Nalis: Right. But like when I was going to school in Italy, the grades are like 0-10, but nobody gets zero. Like if you fail, they’d be like, we’ll give you three. I mean, who needs zero? I feel like maybe credit scores are the same or, like, nobody gets zero zero. Maybe you get like, you know, a good faith 30.
Scott: You’d have bigger problems than your credit score if you were in the 300s. You would be in deep trouble.
Scott: In the approximation of what goes into a FICO score—FICO being the main credit score that the American financial system interacts with. It is a black box, as I mentioned, but FICO gives a breakdown of what the mix of different factors are that go into your credit score. And 10% of that is credit mix. Just the idea that you should have loans of different types, student loans, car loans, credit card debt, things like that.
So that is a small but important factor as well. Other factors include your payment history, of course, your ability to pay back the loans and the credit cards that you’ve taken out, the amounts that you’ve owed, and how much debt you’re taking on at one time, how you’re keeping your balances, the length of your credit history…
So it’s hard for a young person, even with a credit card, to have a great credit score because you need to show years of paying off credit cards and loans and things like that to hit that bucket. And then new credit, you’re always supposed to be kind of taking out new loans and engaging with the credit system in that regard too.
So those are kind of the big five ways: payment history, your amounts owed, the length of your credit history, your new credit, and your credit mix.
Nalis: On this podcast, I really like to dig out the old, old history of things. Is there an ancient history of credit scores? Something that is in some form comparable?
What is the history of debt and credit?
Scott: There aren’t credit scores, but the history of debt and credit is older than time. You know, it is thousands of years old dating back at least to ancient Sumer in 3000 BC, but a little bit more recently than that in about 1800 BC, something called the Code of Hammurabi, from the Babylonian Empire, same region as Sumer, is the first known kind of legal text of that time. And a lot of what it’s talking about is actually debt and credit and usury—the idea of giving people malicious and unfavorable loans and lending at it in a way that hurts people. And so a lot of what the Code of Hammurabi is, is talking about is regulations on lending.
So that’s kind of the turning point in the history of credit and debt. But there wasn’t really the concept of a credit score or a credit report. It was really word of mouth and reputation. And an early form of what we’re seeing now, which is really the concept of a financial identity and that your history and your word for what you’re good for really follows you around as a person.
Nalis: And that was—am I being incorrect? But I think that was like pre-financial system, like even proto-financial system, right? Like, that’s like you have a concept of credit and debit that predates money even.
Scott: Right. Definitely predates concepts of modern currency in agrarian times. And yeah, I think it’s really important that there is always a kind of credit score following people around, even if we didn’t have a range or a number for it, it just came in the form of reputation. And it was person to person and community to community long before it was privatized and imported to the United States.
Nalis: I’m really curious to understand how this one number became such a revered US metric, and you know, how we got so attached to it. So when did the United States start adopting a system that would score your credit and give you a number? And who started that?
Who invented credit scores in the US and why?
Scott: So the modern FICO credit score started in 1989, but FICO as a company dates back further than that to about 1956. It was called the Fair Isaac and Company, named after two men Fair and Isaac.
And that was a solution to the previous system of evaluating creditworthiness, which was incredibly subjective and biased, and it involved people applying for loans and talking to bankers and early credit bureaus, and usually white men—almost always white men—interacting with potential recipients of loans and determining, based on their own set of factors, if this person was good for their money and what interest rate would be good to lend that money out to them at.
And so that was the way that the system worked in the United States for a long time. Credit bureaus are a relatively recent phenomenon, dating back only to the mid-1800s. Obviously, concepts of credit and debt are thousands of years old, but this idea that companies or lenders will have a big aggregated list of everyone who they might be lending to and whether or not they’re good for their money and paying back their loans is a relatively recent concept and certainly a relatively recent private business venture.
Nalis: So you’ve mentioned earlier the way that, FICO sort of assesses people’s credit. Are they the only player in the field or are there other ways or other companies that provide the same service?
Who are all the major credit bureaus?
Scott: So let’s back up. The three credit bureaus are different from FICO. There’s hundreds of credit bureaus, private companies that build reports based on people’s creditworthiness and their credit history.
But the big three that control most of the market are Experian, TransUnion, and Equifax. The way that the credit scores work is that they only take data from those three credit bureaus and what they report. So there’s a lot of interplay between FICO, a fourth company, and these big three credit bureaus.
There are other players in the game as well, but they’re much, much smaller. So there are alternatives to FICO that are popping up, but they aren’t exactly the norm by any means. One is called VantageScore. It’s a joint effort from the three credit bureaus to build a different kind of credit score that still evaluates your creditworthiness, but takes into account factors that might not be on your normal credit report, things like paying your rent on time or paying your utilities or your phone bill or your internet bill. Things that most Americans interact with, even if they don’t already have traditional loans through the financial system. And the thought behind that is by diversifying those proof points in one’s credit report, we can make it more equitable and give people more opportunities to show positive credit in addition to black marks on the report or the absence of loans because of barriers to getting them in the first place.
Nalis: To understand how it works, just to make sure that I get this right. So you’ve got the, you know, credit bureaus, the big three are the most popular and they sort of, like, have the data on all the debt that you make. You know, your credit cards, like when you’re paying, if you’re not paying, if you have medical debt, and then they feed this information to FICO or maybe VantageScore, if you like that. And they then do their sort of, like, algorithm and figure out what your number is.
Scott: Yeah, that’s correct. So FICO only uses data that is provided by the credit bureaus. And the credit bureaus have limitations placed on them about what data they can collect as well: as I mentioned, the limitations on demographic information and personal identifying information and things like that.
And they’re overseen by the FTC and the Consumer Financial Protection Bureau, which is a newer regulatory body in the US.
Nalis: So I want to understand a bit more how the FTC, which is the Federal Trade Commission guarantees this because I have a big question. Like, as a citizen or, you know, as a person who lives in America, I find it insane that my value as a debtor is defined by a private company that in turn gets information from other private companies.
Like where’s the government in all this? Like, who’s making sure that nobody is misjudging me, or, you know, denying me of possibilities that I should have?
What role does the FTC play in overseeing credit reporting?
Scott: So the credit industry is reined in by two important pieces of legislation, the Fair Credit Reporting Act of 1970 and the Equal Credit Opportunity Act of 1974. These were two landmark pieces of legislation at a time when a lot of banking regulations and financial regulations were coming online, and they gave people access to their credit information and tried to eliminate bias by making the credit reporting bureaus delete all their data about demographic information.
And since then, they’re overseen by the Federal Trade Commission, and more recently the Consumer Financial Protection Bureau, which audits these credit bureaus and the credit score company and tries to make sure that they are following the rules and are being fair in the way that they’re treating consumers. That’s the whole point of both of those bodies is consumer protection.
Nalis: So the idea was to make lending money less arbitrary, and I presume potentially opening up the possibility of accumulating wealth by buying homes and cars through loans. Did that actually work?
How inclusive are the financial and lending systems?
Scott: You’re touching on something really important. There’s a super important tension between the original intent of the credit score and the reality of what’s happened since. The credit score was originally invented in order to standardize the way that lenders dole out money and evaluate people for creditworthiness and eliminate their own bias and racism and misogyny and things like that, that could be perverting their views on who is deserving and at what rate.
In reality, it hasn’t fixed all the problems of subjective bias, it’s carried many of them over. These ideas that your creditworthiness is based on your past performance kind of creates a vicious cycle of problems for people who are in minority communities. Legalized redlining and practices of denying people of color bank loans and things like that are very much carried into the current system based on what you’re needed to show in order to get a good credit score in the first place.
Nalis: It seems like a hard balance to strike. You go into a reasonable amount of debt and then something happens, you lose some income, and then all of a sudden you’re behind on all your bills and then your credit score starts dropping. What happens then?
Scott: Yeah, I mean, it’s a slippery slope. I mean, debt is tricky. You. Are incentivized to take on lots of debt, open up lots of credit cards, pay off those credit cards timely. Keep some balance, but not too much balance. That’s a lot for any one person to pay attention to. It creates a lot of room for error, and there are definitely perverse incentives to take on basically enough debt that you can manage and then pay it off.
It’s almost like a strange game. You know, what’s the most debt from the greatest number of sources that you can take on and, responsibly and on time, pay them off. If you can do that, you can maybe game an 800-plus or 850, you know, credit score and get the most favorable loans on your next mortgage or your next car loan.
But there’s so much room for error and the consequences can be steep if you miss a credit card payment. If you are building up credit card debt, you know, long term and keeping a balance on your cards, or you’re not paying your school loans or medical debt, this stuff can really add up and it can just knock your credit score down, down, down.
And when that happens, it just further pushes you out to the boundaries of the financial system and creates this vicious cycle where it’s harder to get those bad marks removed or forgotten, and it’s harder to offset those things with good marks by paying off your credit card on time and meeting your loan payments and taking on new debt in order to offset it in a responsible way. The stuff follows you around. The rule of thumb is that bad marks typically stay on your credit report for seven years. That’s a long time! I mean, you can mess up a few things in one bad month. You could get sick, you know, be in the hospital and forget to, or be unable to, pay your bills and wake up with a credit score that’s plummeted. Or you can be the victim of identity theft and try to get everything expunged.
And sometimes these bureaus just make mistakes and sometimes your score is wrong and you don’t fully know why, and those things can be impossible to get fixed, and that’s a huge problem and just pushes people to less healthy and less safe and less favorable financial institutions like payday lenders and check cashing institutions and things like that. And these things further engage in usury and malicious practices that can further hurt your credit score. So it is a really slippery slope that people can go down if one or two bad things go wrong.
Nalis: At the core though, I feel like something in the system suggests that in order to be a functioning member of American society, you need to make debt. Would you agree?
What is the global economy’s relationship with debt?
Scott: Totally. The global economy runs on debt, and in America, consumer debt is a huge part of how things work here, and there are good things about that too. We can buy things with the promise that we’ll be able to afford it by the time we need to. You can buy a TV on a Monday, and then the next Friday when you get paid from your job, you can pay off your credit card bill.
You know, there are good things about taking on small amounts of debt that should be part of the economy, and consumers should be able to be trusted with the amounts of debt that they are proving themselves every day to be able to pay off. But the problems are when it becomes exclusionary and when it punishes people instead of bringing them back into the fold of the credit system.
It is a double-edged sword. The system makes sense to some degrees, but it does feel like it should be easier to rectify mistakes.
Nalis: Yeah, and alternative ones too, like it continues to seem insane to me that if you have a perfect record of never making any debt like that has to count for something in terms of your credibility.
Like if you made it as an adult without having people knocking at your door every morning that, you know, you owe them money and you just don’t have a credit card or don’t have a loan, like that has to count for something.
Scott: Right. And there’s one fact that really sticks with me—despite this kind of original intent of FICO that was supposed to reduce discriminatory practices, the disparity in credit scores between white and Black Americans is really stark. It’s a 60-point differential between the average white American homeowner and the average Black American homeowner.
Scott: And so, there is something that’s not working right, there. And I think that those numbers alone are proof enough that the system isn’t working equally for everyone.
Nalis: So you mentioned earlier that the economy runs on credit or on debt, depending on how you want to see it. It’s not just Americans, like, the global economy works the same way. What do other countries do, though? Because I moved here from Italy, and from India before that, in either of these places I didn’t have a number attached to my name. So how do other countries establish the creditworthiness of an individual?
How is creditworthiness determined in other countries?
Scott: It’s different. The UK is very similar to the US. Canada is very similar to the US. There’s definitely some other countries that do it exactly the same way that we do, or very, very similarly. There’s also countries that do it very differently. Japan doesn’t have any sort of unified credit reporting system, and it’s all up to the individual private banks to determine based on their relationship with a given consumer whether or not they should grant a loan. And in Japan, they look at things like your salary and your length of employment and your debts, but it’s not as comprehensive, or it’s certainly not unified around a score or a report as it is here.
In a lot of countries, including Spain and the Netherlands, there’s one central reporting entity that’s part of the government, and so they do it that way. And I think there’s good debates whether it should be a private or a public enterprise that’s in charge of that.
And then in a lot of countries, especially in poor nations, there are different ways of figuring out creditworthiness. In a lot of Africa companies really depend on those, what we’re calling alternative means of proving credit worthiness, so rental data and internet bills and phone bills and things like that…and pay slips… because a lot of people don’t have a long history of interacting with these complex loans and products through the traditional financial system.
So some of that conversation that we had in the United States context of bringing more people into the fold of the normal credit system is happening in other countries as well.
Nalis: To end, let’s come back to the US for a second. With what you’ve learned so far, do you think my pursuit of the perfect 850 credit score is at all worthy?
Scott: So, in my research, I have decided that I want an 800 credit score. I don’t have it yet. I would like it. It is nearly impossible to get a perfect 850 credit score according to the data I’ve seen. Uh, 1.2% of Americans have a perfect credit score, and I think part of that must be some sort of fluke or idiosyncrasy that is governing those people.
So I think you can rest easy thinking that if you get into the upper 700s or 800, you can obtain the best, most favorable loans. I don’t think there is much benefit of having a perfect score as opposed to a nearly perfect score. So I think you can take the pressure off yourself in that regard.
Nalis: I feel like there’s, like, exactly three people who have perfect credit scores, and they’re three Muppets called Fair, Isaac, and Co. They are the three, and everyone else is… less than that.
All right, Scott, it was amazing to have you over here. For everyone else, stay tuned because Scott is gonna host the next season of the Quartz Obsession. You’re not allowed to like him more than you do me. But be nice to him anyway.
And that’s our final obsession for the season, folks. The Quartz Obsession is a podcast hosted by me, Nalis Merelli. Katie Jane Fernelius is our producer, and George Drake mixes and does sound design. Music is by Taka Yakuzawa and Alex Suguira. Additional production support provided by multi-platform, editor extraordinaire, Susan Howson, research wizards, Julia Malleck and audience genius, Ashley Webster. Shivank Taksali and Diego Lasarte are our natural born sound engineers.
Special thanks to our guest Scott Nover, who you’ll be hearing a whole lot from in the next season.
If you like what you heard, please review these on Apple Podcasts or wherever you listen to your podcasts.
Tell your friends about us. Then head to qz.com/obsessions to sign up for Quartz’s Weekly Obsession email and browse hundreds of interesting backstories.
I think that’s it! We did it. Oh my God, we did it. I’m getting cupcakes. I don’t know…chocolate.
— to qz.com