Speaker 1: Imagine you are a mother and you have just left an abusive relationship, but you've got a good job and all you need to do is move you and your daughter into an apartment. You can pay the down payment, you can pay the last month's rent. You can see that I'm getting regularly paid and there's more than enough in the account. But they were like, if you don't have a credit score, we can't really look at you. She was categorically denied the ability to even apply for some of the apartment buildings.

Speaker 2: Fred Wehry is a sociologist at Princeton, and that story came from a woman he interviewed in San Francisco back in 2017. Today, there are an estimated 45 million Americans who don't have a credit score, and that can make it really difficult to rent an apartment or get car insurance or even get a job. When credit scores were invented just a few decades ago, they were hailed as a way to democratize lending, play down human judgment, and let computers make most of the decisions. In the United States today, credit scores have become essential. Not having one can basically lock you out of daily life, and having a low score can make life difficult, too. So how did we get here? What exactly are credit scores? And why do they keep so many people from accessing what they need? A credit score starts with a credit report. A record of some personal data points about us, like our zip code and employment history, plus our individual history of paying our debt obligations. Well, some of our debt obligations. See, only data supplied by big lending institutions like student loan servicers, mortgage lenders, credit card companies, and auto financers end up on our credit reports. We might be paying our cell phone bills and our rent each month, but cell phone carriers and landlords don't share that information with these guys, the credit reporting agencies. There are three, and each one has its own version of the credit history of more than 200 million people in the U.S. That data comes from institutions like credit card companies and student loan providers, who send information about our accounts to the credit reporting agencies. The type of loan, the balance, our payment history, and whether the loan has been sent to a collection agency. Then, credit scoring companies like FICO and VantageScore take that information and feed it into an algorithm, which calculates a score between 300 and 850. The scoring companies are pulling from the same three credit reports, but the scores don't always come out the same. One company's algorithm might put more emphasis on the length of your credit history. The longer you've had access to credit, the higher your score. Another company might put slightly more emphasis on the mix of accounts. The more variety, the higher the score. Other factors include payment history. On-time payments mean higher scores. For loans like mortgages and student loans, lower account balances mean higher scores. And for credit card accounts, the percentage of my credit that I actually use. The lower that percentage, the better. Credit scoring companies make money the same way that credit reporting companies do, by selling your score to landlords, lenders, employers, and others willing to pay for it. Lenders use that information to determine whether to loan us money for a house, a car, or a college education. They also use that number to figure out how much we should pay for that loan. A lender looks at a low credit score, decides I'm a risky borrower, and charges me a higher interest rate than my neighbor with a higher score. And this is where things get tricky, for a couple of reasons. First, there's a lot of history baked into that credit score that doesn't show up on a credit report. And second, it's not just lenders who are looking at this information and making decisions that can affect my life. We're going to get into all that, but first, a quick note from the people at Secret.

Speaker 3: Student loans can really make you sweat. Only one in three students understand the financial terms of their loans, and nearly half of federal student loan borrowers don't know how much they owe, or who they owe it to. So how can borrowers go from confused to confident?

Speaker 4: It might sound obvious, but research shows a strong connection between financial literacy and successful student debt management. So let's build out a financial literacy toolkit. First thing to consider is the numbers. Find out how much you owe and what your interest rate is. Prioritize paying off the loans with the highest interest rate first. Second is to learn the terminology. This helps you understand what your options are. For example, auto debit is when you set up automatic monthly payments, which may reduce your interest rate by 0.25%. Bonus tip. Call your lender and see if you can have your payments go directly towards your principal, which is the amount of money you borrowed so you can pay off your loans faster.

Speaker 3: Look into refinancing. That's combining loans into one with a new lender, potentially also getting a lower interest rate.

Speaker 4: Find out if you qualify for student loan forgiveness. That way you can have some or all of your federal loans lifted. And the last thing in the toolkit, making the plan. Follow through on the approach that works for you. Maybe you qualify for the SAVE plan. Or maybe you can make even higher monthly payments to prevent more interest from accruing.

Speaker 3: Make a plan that fits within your financial goals. By understanding your student loans, you can take charge of them. Learn more at secret.com slash moneymoves.

Speaker 2: So how do we get the credit system that we have today? Well, like a lot of systems in the U.S., we need to go back and look at the past to understand the present.

Speaker 5: For most of American history, creditworthiness was really a function of your personal character. Whether the community and people who were interacting with you believed you to be a trustworthy, honest, dependable person. My name is Josh Lauer. I'm a professor of media studies at the University of New Hampshire in the Department of Communication.

Speaker 2: He's also the author of this book, Creditworthy, a history of credit in the United States. In this interpersonal credit system, a dressmaker in Boston might buy fabric from a general store on credit, which the storekeeper bought from a local textile mill on credit, who bought the cotton from his second cousin, a planter in Georgia, on credit. Those lines of credit were built on personal relationships. The thing is, there was a lot of labor happening behind the scenes to make those credit relationships possible. From the enslaved people whose labor created the planter's wealth, to the little children working in the mill, to the unpaid or underpaid care work that made the store owner and dressmaker's businesses possible. Those people weren't part of this credit system, which has ramifications for the system we have today. We'll get more into that later on. But this whole interpersonal credit system, it really starts to break down after the Civil War.

Speaker 5: It's a period where you have people who are moving around, you have new transportation systems, and so you have people who want to have business relationships with people in more faraway places that they've never met, and they have no basis for understanding what their reputation is, and most importantly, whether or not they can be trusted to repay a debt that is given to them.

Speaker 2: In the 1870s, you start to see these, handwritten credit reports. This one is for R.H. Macy, founder of Macy's Department Store. The business is a lucrative one. They pay everything in 10 and 30 days and never owe much. Reports like these were meant for other merchants or lenders, people who didn't know Macy but were considering whether to do business with him. Soon, books like this one let retailers share information about their customers with each other, like whether P.D. Jones of Brooklyn paid on time and should be offered credit. By the 1950s, those reports looked like this. Investigators working for the credit bureaus indicated race, using the dubious categories of the time, as well as character, habits, and morals. According to one training manual, investigators working for the credit bureaus were instructed to uncover whether a borrower was promiscuous, and if so, the extent of partners, as well as possible homosexuality, both of which were considered legitimate reasons to deny someone access to credit.

Speaker 5: There were many women who couldn't get credit cards or couldn't get open credit accounts because the accounts were always in a man's name, and there were minorities who could not get credit accounts because it was a racist credit economy.

Speaker 6: Banks will not lend money for a Negro to purchase in other than what is termed settled areas. Those are areas where there is already a Negro population.

Speaker 5: So these two things ultimately lead to the Equal Credit Opportunity Act, and that begins to regulate the kinds of information that can even be considered in credit decisions.

Speaker 2: But just because categories like race, gender, and sexuality are no longer officially included in credit reports, it doesn't mean that they can't show up in other ways. For example, we know that Black workers are more likely than white workers to be let go during a recession. So that means that employment history can end up being a proxy for race that does show up on our credit reports.

Speaker 1: If you are more likely to be let go in a downturn and be let go earlier than your counterpart, then you're going to have an employment history that looks as if you're not as stable. If you are in a neighborhood whose homes have not appreciated at the same rate as people in other neighborhoods that have nothing to do with the quality of the home or whether or not you've been paying on the home, suddenly you just don't look as if you were in as good a position as some others for taking on certain types of debt or being entrusted with certain kinds of credit.

Speaker 2: When my grandfather returned home from the Korean War, he got a cheap federally backed mortgage that was not available to the Black soldiers that he served with. And when he died and his kids sold the house, part of that money went to my dad, who used it to get a cheap mortgage and build a good credit history. And if you multiply that story by millions of families across the country, you can start to see how the impact of racist policies can reverberate for generations after the laws themselves have been repealed.

Speaker 1: You have an entire history of exclusion that gets excluded in the moment that a history of credit is being assessed.

Speaker 2: Today, more than half of Black adults have a credit score below 650, which means they're usually charged significantly higher interest rates for a 30-year mortgage than someone with a higher score. And credit scores don't just lock people out of affordable mortgages. More than half of all employers in the U.S. say that they consult an applicant's credit history when hiring. So how can we fix the credit system to account for these disparities? Lawmakers in some cities and states have started by outlawing the use of credit scores to make decisions that aren't about lending money, like hiring and promotions or car insurance. People without a credit history or with a low score, they might still be engaging in creditworthy activities, like taking part in an informal lending circle, where friends each contribute a set amount each month and then every person gets the full payout once. One option might be to empower local credit unions or nonprofits to formalize these circles and report those payments to credit monitoring agencies, which could help participants build good credit histories. A few startups are even trying to bypass the traditional credit scoring system altogether. Instead, they're making loans based on rent payment histories and other data.

Speaker 1: If you want your kids to go to college and you don't come from wealth, then you're probably choosing to engage in a credit system and to engage in debt. If I don't have my credit card with me, it's going to be hard to check into a hotel. It's going to be hard to rent a car.

Speaker 2: Access to credit has really become a necessary key for participating in American life. And the system we have today reflects a history in which not everyone had access to that key. When I look to YouTube for solutions for this problem, a lot of the fixes are aimed at individuals, tips and tricks for boosting your score and fixing your credit. And that stuff is helpful. But if we're going to level the playing field and give more people a fair shot, we're going to have to think bigger.