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Bad Credit

Responsible lending laws, if axed, will engulf many Australians in debt they can’t afford

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Need to know

  • Lenders, by law, must take reasonable steps to check that a person is able to repay a loan before approving it
  • New reforms proposed by the Australian government will remove this requirement
  • Financial counsellors fear they will be overwhelmed if the reforms go ahead

When Shahir Azamy walked into a Commonwealth Bank branch in Melbourne in December, 2016, it was to get information about a loan for a car. 

Shahir, who had just turned 18, lived with his three siblings and their father and mother, whose disability support pension and carer’s payments covered the bulk of the family’s living expenses. 

Shahir worked two jobs at the time, one at a clothing store and the other at Woolworths, and his combined pay barely covered the rest. 

A Commonwealth Bank salesperson ushered Shahir into their office, bought him a coffee, and told him that getting a loan was a great idea, and that it would show up as good credit when he wanted to get a home loan later in life. 

A personal loan, they said, would give Shahir greater access to other forms of credit than a car loan would. “They made it sound like it was going to be so easy to pay back,” Shahir recalls. He signed up for a $15,000 personal loan on the spot. 

They made it sound like it was going to be so easy to pay back

Shahir Azamy, about signing up for a $15,000 loan with CBA

But as he left the bank, Shahir felt unsettled and confused. He realised that he didn’t know when he would be getting the funds, so he walked back inside to ask. The salesperson said it would take two to three days, and Shahir left to catch a bus home. 

It was on the bus that he looked through the loan contract for the first time. He didn’t understand what any of it meant and felt sick in his stomach. He thought: ‘What the hell did I do?’ 

The following month, Shahir went back to the bank. He needed to pay a few bills, and the bank gave him a credit card. “They said I was eligible for $10,000, but I said I want the minimum, which was $3000,” Shahir says. 

He made repayments on both his loan and credit card for about seven months. Then he started to fall behind. “Once you miss one payment, you spend two weeks trying to catch up to that payment – and then you only have two weeks to pay the next one off,” Shahir says. 

He tried using his credit card to pay off his loan – the late fees were much higher for the personal loan than the card – thinking he would pay off the credit card later. But he couldn’t sustain it. 

The bank paused his repayments for several months, but Shahir couldn’t catch up. When he got default notices demanding that he pay, he became anxious.

Since the 2000s, mounting evidence of predatory lending has prompted governments to strengthen consumer credit laws.

In July, 2017, he went to a car dealer to see if he could get a better repayment plan by trading in his car. A group of salesmen at the dealership offered Shahir a car for $15,000, which was what his current car had cost.

They told Shahir that a loan with PowerTorque Finance – a division of Toyota Finance Australia – would be easier to repay than his current loan. They said PowerTorque would be more lenient and the late fees were so low Shahir wouldn’t even notice them, if it came to that.

The finance officer asked Shahir if he had any expenses, such as a gym membership. Shahir said yes, he had a gym membership. “And they’re like, ‘We’ll just put down that you don’t have a gym membership’,” Shahir recalls. 

“I started smiling because I thought he was helping me, but he was just trying to help himself.”

Shahir tried to ask questions about the new loan, but the finance officer nudged them off. It was late in the afternoon, and he was rushing Shahir to finish the deal. Shahir signed the signature page, and was handed the rest of the contract afterwards. That’s when he saw that he was getting $7000 in return for his car. 

Shahir was stunned. He had thought that trading in his car would get him $15,000 back – money he could use to pay off his personal loan. Instead, he now had a loan with Toyota Finance worth $18,000 – for the car and add-on insurance and fees – as well as a combined debt of $17,000 with the bank. 

‘Long overdue’ lending laws

Since the 2000s, mounting evidence of reckless and predatory lending has prompted governments to strengthen protections for people seeking credit. 

In 2008, as the effects of such lending practices revealed themselves in the Global Financial Crisis, the Council of Australian Governments proposed broad reforms for the lending sector.

More than a year later, after extensive consultation, negotiation and scrutiny, the Rudd government introduced into Parliament a raft of measures termed the ‘Consumer Credit Protection Reform Package’, which included a national licensing scheme and responsible lending obligations. 

Credit providers were expected to meet their responsible lending obligations in two key ways – the first was to make reasonable inquiries to assess whether a credit contract would meet the borrower’s needs and aims. The second was to take reasonable steps to verify that the person would be able to comply with the contract without substantial hardship. 

Responsible lending laws are incredibly important to getting at least some remedies for people who have been given unaffordable loans

Barbora Jezek, Consumer Action Law Centre solicitor

By law, lenders now had to bear some responsibility for making sure that a person would be able to repay a loan before giving it to them. 

Raj Venga, who was then the ombudsman at the Credit Ombudsman Service (since replaced by the Australian Financial Complaints Authority), said the legislation was “frankly, long overdue”. 

Nevertheless, the number of households in Australia with debt three or more times their income has been rising: up from 23% of households with debt in 2006 to 28% in 2018. That year, the financial services royal commission showed that exploitative practices still abound in the industry, as witness after witness detailed how their lives had been marred by debt. 

In his final report, royal commissioner Kenneth Hayne advised that responsible lending laws should either stay the same or, if found to be deficient, be tightened.

Desperate for a solution

Shahir struggled to make his repayments. The ones he missed – along with the fees and interest – were stacking up. He lost his appetite due to the stress, and started losing his hair.

As Christmas neared, the clothing store got busier and increased Shahir’s hours. They kept overlapping with his shifts at Woolworths, so he left the supermarket job. But when the holiday season ended, the clothing store cut his shifts down to five hours a week. This wasn’t enough to help cover his family’s expenses, so he left and signed up for Centrelink, which paid more. 

The ATO ordered Shahir to pay thousands of dollars as part of the government’s robodebt scheme, and he used his credit card to do so

For Shahir, the months that followed are a blur of threatening letters, emails, phone calls and texts from creditors, of applying for jobs online and driving around, handing out his resume to any workplace that had labouring jobs. “I took it to retail shops a little bit as well because that was my background, but I thought that factories would hire you the quickest,” he says. 

At one point, the Australian Tax Office ordered Shahir to pay thousands of dollars as part of the government’s robodebt scheme, and he used his credit card to do so. 

At another point, desperate for help, he responded to an online ad for debt consolidation. The firm behind the ad told Shahir to declare bankruptcy. “I didn’t want to do that,” he says. “I’m just like, I’ll deal with it myself. I’ll try and get through this.”

But by mid-2019, Shahir had come to feel like there was no way out. He couldn’t see how he would ever repay his debts, which had grown to about $36,500, and the default notices and legal threats kept streaming in. 

At times, Shahir thought about taking his own life. “My weeks were exactly the same,” he says. “Monday was no different to the next Monday, I’ll do the exact same thing: get the exact same letters, have the exact same thoughts.” 

In July, Toyota Finance told Shahir they were coming to take his car. To stop this from happening, he drove his car to a car park at nine o’clock every morning, and sat there until 5pm. He didn’t want to tell his parents what was going on. “That would literally kill my father because, honestly, it was a really, really bad situation,” he says. 

After weeks of this, as he sat in his car one day, Shahir searched online for help with his debts. “I was desperate, I would look at anything,” he says. “I would call up anyone to see if I can get help.” 

Consumer Affairs Victoria came up as one of the search results, and he called them. The regulator referred his case to the Consumer Action Law Centre. Within days, he got a message from Barbora Jezek, a solicitor there.

How the current laws work

Barbora has spent the last three years representing people with issues that are covered by consumer and credit laws. For many of her credit law clients, debt has plagued them for much of their adult lives. 

What Barbora stresses is that, generally, people aren’t as good at assessing their income and expenses as lenders are. But lenders have an incentive to sell loans whenever they can. “So we often have people who should never have been given that loan – because it’s not affordable – and they try and they try, but eventually they can’t keep up,” she says. 

New reforms proposed by the Australian government, which will wind back responsible lending obligations, would exacerbate the situation. Removing the requirement of lenders to verify people’s finances would make getting credit easier, but no less harrowing for those who find themselves with spiralling debts. 

Barbora says it’s already difficult to get remedies under the current laws. The standard remedy for breaching responsible lending obligations, she says, is that the fees and interest will be waived, but you have to pay the principal of the loan back. “Ultimately, it just means that the lender doesn’t profit, but they don’t have a penalty either.”

In Shahir’s case, Barbora thinks his lenders took advantage of him, knowing he was young and inexperienced. In November, 2019, she wrote to Toyota Finance claiming the company had breached responsible lending laws. 

[We are] replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle

Australian Government factsheet on consumer credit reforms

Toyota Finance, she said, had failed to verify Shahir’s financial situation and had engaged in an unjust transaction. Shahir was in a considerably weaker bargaining position given his age and experience, and the fact that he hadn’t received legal or financial advice, she wrote. High-pressure sales tactics were used to get him to enter into a loan unsuitable for his requirements and financial circumstances.

Barbora also noted that Toyota Finance had continued to demand payments from Shahir even after she told them the Consumer Action Law Centre was acting on his behalf and to stop contacting him. This was a breach of debt collection laws, she wrote.

Based on these breaches, and the $5000 Shahir had already repaid, Barbora asked Toyota Finance to accept a request for Shahir to return the car, and to waive his remaining debt. She also asked the company to pay Shahir compensation for the distress caused by their unlawful debt collection activities. 

Toyota Finance denied any wrongdoing and refused the request. In January this year, Barbora lodged a complaint against them to the Australian Financial Complaints Authority (AFCA).

In September, she wrote to the Commonwealth Bank with a similar request. At some point, the bank had sold Shahir’s loan debt to Pioneer Credit, a debt collector. Barbora asked the bank to buy back and waive this debt, as well as waive Shahir’s credit card debt.

Promoted by both government and industry as removing barriers to credit, new reforms will also remove protections from bad credit.

She based the request on concerns the bank had breached responsible lending laws, the fact that Shahir had already repaid $7300, and on compassionate grounds, given Shahir’s limited income and the depression and anxiety he had been suffering.

By late October, Barbora hadn’t yet heard back from AFCA or the Commonwealth Bank. For Shahir, the wait has been difficult, but nowhere near as difficult as the years before he received the help of the Consumer Action Law Centre. “It was dark for me and there were some thoughts,” he says. “Barbora saved me.”

We asked Toyota Finance on what basis they had rejected Shahir’s request, and we asked AFCA for an update on the complaint. Both AFCA and Toyota Finance said they couldn’t comment due to privacy reasons. 

Financial counsellors and consumer advocates, including CHOICE, fear a wave of debt among people who have lost income as a result of the pandemic

We also asked the Commonwealth Bank if they intended to waive Shahir’s debts. In a written statement, the bank told us Shahir’s credit applications were “assessed correctly for serviceability in an ethical manner and met the bank’s responsible lending guidelines at the time of application”. 

But over the following days, the bank told Barbora they wished to settle both of Shahir’s debts. First, they waived his credit card debt. Then they recalled his loan debt from Pioneer Credit and waived that, too.

When Barbora told Shahir the news, he couldn’t believe it. “I still can’t process it because this is debt I’ve had for almost four years,” he says. For a moment, he is lost for words. Then he continues: “Before, every night, the last thought I had before my head hit the pillow was, ‘You are in massive debt for a 21-year-old’.” Knowing more than half of that debt is gone, he says, is “such a weight off my shoulders”.

Winding back protections

Barbara says responsible lending laws are “incredibly important to getting at least some remedies for people who have been given unaffordable loans”. If the laws are removed, “it would be a lot harder to get fair outcomes for people who’ve been caught up in predatory lending”.

Banking associations have welcomed the government’s planned reforms, which – in line with government messaging – they say simplify lending laws. But they have steered clear of repeating the government’s other catchlines declaring that “borrowers will be made more accountable” or replacing the “lender beware” principle with “borrower responsibility”. 

Promoted by both government and industry as removing barriers to credit, the reforms will also remove protections from bad credit. ASIC and individuals will no longer be able to take banks to court for harm caused by irresponsible lending.

We asked Treasurer Josh Frydenberg’s office why the government is ignoring findings from the financial services royal commission in its rush to dismantle regulations that were introduced, after much deliberation, to address proven problems with lending practices. 

It will not be uncommon for financial counsellors to have clients who have been thinking that suicide is the way out

Fiona Guthrie, CEO of Financial Counselling Australia

We also asked what consultation and negotiations the government has engaged in before coming up with their planned reforms, what scrutiny has been applied to them, and whether the government has considered that these changes could cause serious harm to Australians by weakening their protections. 

The Treasurer’s office didn’t answer these specific questions. Instead, they emailed us a statement, attributed to Frydenberg, that was sent to the media when the Treasurer first announced the proposed reforms, which he says are designed to “increase the flow of credit to households and businesses, reduce red tape and strengthen protections for vulnerable consumers”.

The statement says it is “more important than ever” to implement these reforms in the time of the COVID-19 pandemic, and that the changes will “reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal”. It continues: “Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan.”

Financial counsellors and consumer advocates, including CHOICE, fear a wave of debt among people who have lost income as a result of the pandemic.

“We’re still seeing examples of irresponsible lending, people being given credit which is unaffordable, because lenders are not properly verifying income, they’re not verifying expenditure,” Fiona Guthrie, CEO of Financial Counselling Australia, told viewers at a CHOICE-run briefing about the government’s proposed reforms. 

Some people come to financial counsellors and legal centres on the brink of homelessness because of their debts. Others have been considering bankruptcy. Some, like Shahir, have suicidal thoughts. “It will not be uncommon for financial counsellors to have clients who have been thinking that suicide is the way out for them,” Guthrie says. “Every financial counsellor is trained so that they know how to respond to that.”

Guthrie, who is on the CHOICE board, believes financial counsellors will be overwhelmed if the changes go ahead. “We’re in the worst recession for 100 years, we are gearing up for a really tough time,” she said. “If we have this on top of it, I don’t know how we’re going to cope.” 

If you’re in financial trouble, you can call the National Debt Helpline on 1800 007 007.

If you’re experiencing a personal crisis, you can call Lifeline on 13 11 14 for support.

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Bad Credit

How to get a business credit card with bad personal credit

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Dear Business Banter,

I want to start a business, but I have bad credit. What are my options? – James

Dear James,

Although an impressive credit history and high credit scores aren’t required to start a business, they sure help! After all, you may soon want to borrow funds from a financial institution so you can do everything from pay for the costs of a launch to managing ongoing operations.

To appeal to a lender, your past credit history will be relevant. Thankfully, you can overcome the problems associated with bad credit to qualify for a business credit card—and a loan, since that might be necessary too.

Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.

Build up your score

Since your business has yet to begin, you don’t have a business credit profile that can help you qualify for credit products. Therefore, lenders will assess your personal creditworthiness to determine qualification and set terms.

To know what is dragging your credit scores down, pull your credit reports up. You can get a report from each of the three credit reporting agencies—Experian, TransUnion and Equifax—once a year for free from annualcreditreport.com.

The information listed in the sections for trade lines, public record, and credit inquiries of your credit report is all inputted into scoring models, so read your reports carefully. If you spot any inaccuracies, file a dispute with one of the credit reporting agencies. The one you use will notify the other two, and your files will be updated.

To improve your scores (even when the negative data is still being listed):

  • Pay all credit accounts on time. Although late payments hurt credit scores (especially when there are many, or accounts are seriously delinquent), establishing a perfect payment history from this point forward will help mend the damage.
  • Reduce credit card debt. If you have credit cards and they’re maxed out, reduce the balance to well below the credit limit.
  • Open up a credit card. Consider opening a personal credit card. Many credit cards are created specifically for people with bad credit. Once you have it, choose a small bill to charge each month, then pay it off in full and on time.
  • Add utility and cell phone accounts to your report. The more on-time payments you have on your credit report, the better. Experian has a free Boost program where you can add non-credit accounts to your file. Those payments should help give your FICO 8 credit score at least a few extra points.

With this strategy, your credit score will increase over time.

See related: Do I need a business credit score to start a business?

Get a business credit card

Although you can use a personal credit card for your business, it’s better to get one specifically for your company. They offer benefits that are designed to help business owners do everything from handle their enterprise’s expenses to helping with accounting.

Just be aware that these cards remain your personal responsibility. Even if it’s in your business’s name, you will be on the hook for all payments and any outstanding debt.

So, how can you get a business credit card with bad personal credit? When your scores are at least in the “good” range, start looking into the business credit card options that are available. As you’ll see, there are many from which to choose, so give this task plenty of time.

Be aware that some business cards are charge cards while others are credit cards. With a charge card, there is no preset limit, but you’ll need to pony up the entire balance within about 30 days. With a credit card, there is a maximum amount you can charge, but you can pay at least the minimum requested payment and then revolve the rest. Ultimately, you may want one of each.

When your scores are at least in the “good” range, start looking into the business credit card options that are available.

Almost all business cards have rewards programs attached to them, so read over the program’s details and focus on those that you’ll use. For example, if you think traveling will be in your future, concentrate on a card that gives you the best perks for flights, airport amenities, hotels and car rentals.

Many business credit cards offer excellent sign-up bonuses, too, where you would receive a large amount of points, cash or miles after spending a certain amount with the card within a few months of activation.

Some also offer 0 percent APRs for a fixed number of months, which will give you a nice amount of time to pay for your venture’s needs before financing fees are assessed. As long as you pay the debt in full before the real rate begins, you get a free loan! As you use the card, you’ll be racking up rewards.

These programs differ, so make sure it’s a good match. One card may offer an exceptional reward value for restaurant meals, while another gives the most for things like office products.

Finally, prepare for annual fees. Not all cards charge them, but if you get more out of the account by way of perks and rewards, you’ll come out ahead. Choose wisely.

Look into loans

Credit and charge cards tend to be great for short-term financing, while business loans are preferable for big-ticket expenses that you want to pay off over several years.

To get a business loan with the best terms, it’s best to wait until your credit is in decent shape. However, if you must borrow a significant amount of money right away and then pay in equal installment payments, there are startup business loans for bad credit.

Loans with no credit checks still pass through an approval process, but the lender analyzes your assets and income for approval instead of your credit history. If it appears that you can make the payments that are associated with the loan, it should be approved. Other lenders do check credit reports and scores, but the standards for qualification are low.

In either case, loans that are developed for people with bad credit tend to be smaller and come with higher interest rates than those for people who have good credit.

Whichever loan you get, simply pay it off according to the agreement. Assuming the lender furnishes information to the credit reporting agencies (most do, but if you get a “no credit check loan,” ask the lender to be sure), it will help your credit scores rise.

Take these simple steps and you’ll not only repair your bad credit but will have the good credit products for your business!

Bottom line

To qualify for a business credit card (and a business loan), take action to improve your personal credit history.

Shape up your FICO score, identify the right business card for your needs and consider a business loan.

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Bad Credit

Home Equity Loan With Bad Credit: Can It Be Done?

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Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Home equity loans let you turn your equity into cash, which you can use to pay for home improvements, unexpected medical expenses, or any other bills you might be facing.

Generally, lenders require at least a 620 credit score to qualify for a home equity loan. If your score isn’t quite there yet, though, you still have options.

Here’s how you may be able to get a home equity loan with bad credit:

  1. Check your credit and try to improve it
  2. Find out your debt-to-income ratio
  3. Find out how much equity you have
  4. Think about bringing on a cosigner
  5. Shop around for the best rates
  6. Consider alternatives to bad credit home equity loans

1. Check your credit and try to improve it

To start, head to AnnualCreditReport.com and pull your credit. You get one free report from all three credit bureaus per year.

Once you have your credit report, check it for errors and evidence of identity theft, such as accounts you don’t recognize and credit cards that aren’t yours. Reporting these to the credit bureau can help improve your score. So can taking these steps:

  • Pay all your bills on time: Payment history — or your track record of payments — accounts for 35% of your score, so make it a point to pay all of your bills on time, every time.
  • Pay down your debts: Lenders want to see a credit utilization rate of 30% or less — meaning your balances account for 30% or less than your total available credit.
  • Keep credit cards open: How long your accounts have been open impacts 15% of your credit score, so avoid closing accounts — even once you’ve paid them off.
  • Avoid applying for new cards: This will result in hard credit inquiries, which can hurt your score.

Learn More: How Your Credit Score Impacts Mortgage Rates

2. Find out your debt-to-income ratio

Lenders will also consider your debt-to-income ratio (DTI) when you apply for a home equity loan. This indicates how much of your monthly income goes toward paying off debt.

How to calculate DTI: Add up your monthly bills and loan/credit card payments, and divide the total by your monthly income. Multiply that amount by 100.

For example, if you have $2,000 in debt payments and make $6,000 per month, your DTI would be 33% ($2,000 / $6,000 x 100).

Most lenders want a DTI of 43% or lower. A low DTI can help improve your chances of getting a loan, especially if you have a lower credit score, since it indicates less risk for the borrower.

3. Find out how much equity you have

How much equity you have in your home, as well as your loan-to-value ratio, will determine whether you qualify for a home equity loan — and how much you can borrow. To find out yours, you’ll need to get an appraisal, which is a professional evaluation of your home’s value. The national average cost of a home appraisal is $400, according to home remodeling site Fixr.

Once the appraisal is finished, you can calculate your loan-to-value ratio by dividing your outstanding mortgage loan balance by your home’s value.

For example: If you have $100,000 remaining on your home, and the appraisal determines it’s worth $200,000, then you have an LTV of 50% ($100,000 / $200,000). This also means you have 50% equity in the home.

Most lenders will only allow you to have a combined LTV of 85% — meaning your existing loan, plus your new home equity loan can’t equal more than 85% of your home’s value.

In this example, you’d be able to borrow $170,000 (85% of $200,000) across both your initial mortgage loan and your new home equity loan. Since your existing loan still has $100,000 on it, that’d mean you could take out a home equity loan of up to $70,000.

4. Think about bringing on a cosigner

Bringing in a family member or friend with excellent credit to cosign your bad credit loan can help your case, too. If you do go this route, make sure they understand what it means for their finances. Though you may not intend for them to make payments, they’re just as responsible for the loan as you.

Tip: If you fail to repay the loan as agreed, it could hurt the other individual’s credit score or result in collections against both of you. Make sure you’re upfront and transparent about what cosigning your loan may mean for them.

5. Shop around for the best rates

A lower credit score will typically mean a higher interest rate, so it’s incredibly important you shop around and compare your options before moving forward. Get rate quotes from at least three to five lenders, and make sure to compare each loan estimate line by line, as fees and closing costs can vary, too.

Credible makes comparing rates easy. While Credible doesn’t offer rates for home equity loans, you can get quotes for a cash-out refinance — another strategy for tapping your home equity. Get prequalified in just three minutes.

Get the cash you need and the rate you deserve

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Find My Loan
No annoying calls or emails from lenders!

6. Consider alternatives to bad credit home equity loans

A bad credit score can make it hard to get a home equity loan — especially one with a low interest rate. If you’re finding it difficult to qualify for an affordable one, you might consider one of these alternatives:

Cash-out refinance

Cash-out refinances replace your existing mortgage loan with a new, higher balance one. You then get the difference between the two balances in cash.

Find Out: Credit Score Needed to Refinance Your Home

Personal loans

Personal loans offer fast funding, and you don’t need collateral either. Rates can be a bit higher than on home equity loans and refinances, though, so it’s even more important to shop around. A tool like Credible can help here.

Check Out: Home Equity Loan or Personal Loan: How to Choose the Best Option

Compare multiple lenders

If you have bad credit, there are still ways to tap your home equity or borrow cash if you need it. Head to Credible to see what personal loan options and mortgage refinance rates you might qualify for. With Credible, you can easily compare prequalified rates from all of our partner lenders without leaving our platform.

About the author

Aly J. Yale

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and a contributor to Credible. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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Bad Credit

A Look Back At Housing 2020: Rental Housing Gets Riskier

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According to the American Housing Survey cited in a recent article, there are about 48 million rental housing units in the United States ranging from single-family homes to large multifamily apartment complexes. Of those 48 million units about 23 million are owned by individuals, according to a recent Rental Housing Finance Survey; that’s more than half of the occupied units in the country. Yet private rental housing providers have been under relentless attack in recent years increasing risks and costs. This has worsened in 2020 as I have pointed out. More risk means fewer housing units and higher prices, not a good outlook for the future.

Any business based on renting assets is based on risk. Think about the last time you went bowling. When you rent the shoes, the person behind the counter often will hold a driver’s license? Why? It’s a way of offsetting the risk that you’ll go home with the shoes either on purpose or accidentally. Nobody wants to deal with a lost driver’s license. Offsetting this risk has absolutely nothing to do with you or your trustworthiness; it is uniformly applied and routine.

Housing providers have to similarly offset the risk of allowing a stranger occupy their private property. There are several ways of doing this, including using credit checks. But lately, politicians are beginning to eliminate the credit check from the tools that housing providers can use to offset risk. Minneapolis for example has eliminated credit checks arguing that they are a “barrier” to housing.

Is race a factor in bad credit and thus a barrier to people of color to get housing? The fact is, yes, African American people have more credit issues. But would eliminating credit checks help them? The answer is, “No.”

An article in the Washington Post, “Credit scores are supposed to be race-neutral. That’s impossible,” is emblematic of how this issue plays among the public and policy makers. The author says two contradictory things. First,

“This would lead one to think that credit-score calculations can’t be biased. But factors that are included or excluded in the algorithms used to create a credit score can have the same effect as lending decisions made by prejudiced White loan officers.”

Then she writes,

“One quick way to impact your credit history is a court-ordered judgment. And Black borrowers are more likely to fare badly when taken to court by their creditors. Debt-collection lawsuits that end in default judgments also disproportionately go against Blacks, according to a 2020 Pew Charitable Trusts report.”

Logically, the right way to state this is that credit measures are biased against people who have default judgments against them, and African Americans have higher rates of defaults. Then the next question would be, “Why?” The most obvious answer is the right one, poverty is disproportionately concentrated among people of color.

But eliminating credit checks for housing won’t help that problem. If a housing provider is unable to evaluate risk based on past financial performance her only option will be to raise rents and deposit amounts in case there is a problem; that extra cash would provide a buffer if a resident stops paying rent. This won’t help anyone with less money. What’s the response to that? Ban rent increases by imposing rent control! That’s a bad idea too and won’t help either.

The answer is to figure out how people who have less money and therefore have more issues making ends meet can solve that problem and improve their credit scores. The author of the Washington Post article makes a sensible suggestion: include steady rent payments in credit scores. Some housing providers do, and it’s a great idea. But it is a positive one that actually helps the family; banning quantitative measures of past financial performance doesn’t.

The danger that unfolded in 2020 is that justifiable outrage about racism could lead to interventions that don’t address poverty and it’s negative consequences like default judgments but elimination of accepted measures of those consequences. Eliminating the evidence of poverty – struggling to pay bills – doesn’t help pay the bills! At best, these kinds of measures sweep the problem under the rug ensuring higher rents and making housing a risky business only big corporations will be able to do.

The answer is to address the broader underlying issues of poverty and increasing housing production. When there is more supply of housing providers compete with providers for residents and will be forced to bargain with potential residents, even those with dings or dents or completely destroyed credit. Housing abundance solves a housing problem while eliminating measure of risk only makes that risk higher and actually creates a housing problem.

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