Credit scores are a financial trap. Here’s how I’d fix it.

Credit cards and lending companies lure you into a debt cycle. Mic’s AJ Dellinger has an idea to make things a little more fair.

An illustration of a man reaching for a light of a large anglerfish underwater
Illustration by Maxine McCrann
How I'd Fix it

So much about the world is broken right now. The planet is boiling, inequality is skyrocketing, and government gridlock is more darkly comic than ever. The Hollywood industrial complex regurgitates old stories and makes them worse, while music execs play to the whims of the algorithms more than any sense of craft. It’s all just so depressing. How I’d Fix It is Mic’s series of solutions to society’s ills. Got a fix of your own in mind? Email with your pitch, and be sure to include “How I’d Fix It” in the subject line.

Have you ever heard someone say that money isn’t real? Well, they’re right — but in a more literal sense than you might imagine. Nearly 90% of all money has no physical form. Banks are only required to hold 10% of their reserves in physical cash at any given time. The rest is just numbers on a screen — and most of that money is actually credit or debt.

Think about that: Most of your money is not cash and coins. It’s invisible credit that has been lent to you by credit card companies and financial institutions. The average American has more money available to them through lines of credit ($22,751) than they do through savings ($17,135). If a big purchase or emergency situation comes up, they are more likely to pay for it in credit than cash. The system rewards this: Generally speaking, the more credit you have available and the more lines of credit that you are actively maintaining, the better your credit score will be. And while you’ll get dinged for having too much debt, carrying some debt is rewarded.

Herein lies the catch-22 of credit and debt: In order to get larger lines of credit and better terms to help minimize your debt and expenses, you need to have good credit. And if you don’t have good credit, trying to build it puts you at a higher likelihood of getting stuck in a debt trap. You are more likely to be exposed to high annual percentage rates (APR) for interest, get stuck with lower credit limits, and generally have a harder time improving your credit.

A low credit score cuts you off from aspirational purchases and essentials alike. Nearly 60% of millennials report that a low credit score has resulted in them losing out on a loan, with 1 in 4 reporting being unable to get a car or apartment because of credit checks. People are being kept from real things they actually need because of fake money that they can’t access because of a fake score. If that’s not enough to make you want to walk into the ocean, then bless your resilience.

This system is trash. It’s time to fix it. And the best tool we’ve got for that is the government itself.

First, we need to dismantle the three major credit reporting bureaus and destroy whatever black box holds the algorithm for generating credit scores. This, frankly, should not be controversial. The big credit bureaus — Equifax, Experian, and TransUnion — run a racket, and they aren’t even good at what they do. Equifax leaked everyone’s Social Security numbers. The Federal Trade Commission has found that 1 in 4 people have errors on their credit reports that can affect their scores. You have to review and challenge these mistakes on your own time, and you have to pay to even look at your report in full (you only get one free credit report every year). No one likes credit bureaus, and they shouldn’t; they suck.

A solution here — and one that the Biden presidential campaign reportedly considered — is a public credit registry. The Consumer Financial Protection Bureau can run it, thus stripping out the profit motive that comes from holding all the data and selling access to it. The CFPB can create a transparent means of calculating credit scores, provide free access to credit reports, and standardize the process of reporting and removing bad data. The National Consumer Law Center backs this idea, as does the think tank Demos. It’s a no-brainer, so let’s do it.

The next step would be cancelling a whole bunch of debt. Student debt? Let’s go ahead and strike that out — you know, like President Biden could if he wanted. Then let’s get rid of the $81 billion of medical debt that we’ve saddled people with, which is apparently the cost of staying alive in a capitalist hellscape. We’ve already taken the smallest of baby steps toward some good work here, with the credit bureaus announcing that they won’t factor in some medical debt in credit scores, but we should just save the hassle and cancel it all together.

All of this amounts to a reset. But the problem is that we’re so deep into this system of debt that we’re unlikely to ever fully shake it without some sort of financial collapse or revolution. So instead of full tearing down the walls, we can keep some of them up — and figure out how to bounce off them in a more productive way.

Fortunately, we already have a powerful institution that knows a thing or two about made-up money: the federal government. If the money printer can start whirring at a moment’s notice to fight economic downturns or keep cash flowing during a global pandemic, surely it can be used to extend a line of credit to Americans who need access to financial support without the risk of bankruptcy or debt traps.

Here’s how it’ll work: Once you turn 18, you will be given access to a federally-issued credit card. Steve Randy Waldman, a computer programmer and economist who floated this idea back in 2009, called it a Treasury Express card. Great. The Treasury Express would guarantee every person access to a line of credit.

How much, exactly? Waldman capped it at $1,000 in his proposal. Let’s go with a little more generous alternative, though, and tie it to the median income in the U.S. In 2020, that was $35,805, which works out to about $3,000 per month. So we’re setting the credit limit at $3,000. A vast majority of the American working class lives paycheck to paycheck, and any disruption to that can spell disaster. With a Treasury Express, if you suddenly find yourself without a job or income, you’d have access to a line of credit significant enough to cover one full month of expenses for the median household. (Mic reached out to Waldman to get more details about his proposal but did not receive a response.)

If you’ve never had a credit card or access to these types of financial services before, the federal card is a good introduction. “It increases access to financial instruments for those who could not get credit or debit cards on their own, which means inclusion,” Dr. Tahira K. Hira, a professor of personal finance and consumer economics at Iowa State University, tells Mic. It also would extend a line of credit to people who have historically been kept out.

This should also functionally eliminate the need for payday loans. About 12 million Americans use payday loans every year, usually in small amounts just to get by until their next paycheck. Payday loans are about the worst credit product available, with wildly predatory rates that result in most recipients of payday loans paying way more in fees than they actually receive in financial support. Killing payday loans would be a welcome side effect of a federally issued line of credit.

You might be wondering what the interest rate would be on the federal card. Easy: 0%. That’s not to say there isn’t a penalty for failing to repay, of course. If you have a balance on your card, you will be required to pay it off at the end of the month, with a grace period of an additional month to start paying it down. As long as you’re making payments toward the balance, you’ll continue to have access to the line of credit. But failing to pay it off will restrict your access to other credit products offered by the government, like home loans. After a period of five years, any outstanding balance would be forgiven and you would have access to the full $3,000 again.

Surely, there will be people who object to this idea: “It’s a government handout”; “It’s like giving people a free $3,000, they are just going to use it and not pay it back”; etc. First, odds are people are not going to forego access to other major lines of credit, like home loans, student loans, or other credit cards just to access a free $3,000 every five years. That would be a very bad financial decision.

“Will some people make mistakes and mismanage? Yes, that is possible,” Hira says. “But that is also [part of] a learning process.” She notes that this system would help to educate people about the banking and credit system in a much less risky way than our current set-up.

And second, you’re goddamn right it’s a handout. Helping people improve their credit so that they can access things like mortgages and car loans is a public good. We’re better served by more people having the ability to own what they need. This card accomplishes that within our extremely broken credit system.

The current credit system is rigged in favor of people who already have plenty of money available to them, and burdens the people who most need the help. Let’s extend some much needed credit access with considerably fewer strings. If the economy has to be driven by credit and debt, the least we can do is make sure people can access it — and do so safely.