Saturday, June 18, 2005

Industry's Dirty Secret on Identity Theft and Credit Issues

With all of the reports on identity theft and the fraud surrounding credit cards and reports, there has yet to be an inquiry on the real problems behind it all.

I started a credit repair company back in 1987 after graduating college named Credit Guard. I saw a lot of credit reports and practices by small businesses, large corporations, credit bureaus, and consumers alike.

It still amazes me that years later the industry has changed very little in spite of the laws and regulations enacted by Congress.

The dirty secret is really that the credit reports of Americans have been ruined for years by mismanagement on all sides of the table (companies that report to credit bureaus, credit bureaus themselves, and individual consumers) and that our society has really grown into a caste system based upon your credit report and scores.

The caste system allows temporary justification why certain people are charged more in terms of interest rates and other terms that a sane person (with good credit or paying cash) would not agree to otherwise.

People with good credit are not going to fight for the rights of people with supposedly bad credit. This is America where you have the right to succeed or fail if you want to.

Everything seems justified (harassing collection calls, customers lying on the phone, etc.) only because a credit report declares that a person may present a higher risk to do business with (credit and collection departments cost a ton of money when customers do not pay on time).

But this situation only creates a negative vicious cycle in which people with poor credit scores feel that they really have nothing to lose if they ever face a temporary financial setback or other priorities take precedence on a certain day of the month.

There are some companies that report to credit bureaus with credit departments that have been more than ready, willing, and able to give a customer a bad credit rating if the customer did not comply with their wishes before, during, and after the financing had taken place.

Being judged to have bad credit creates an easy way out of long-term fiscal responsibility for everyone involved and leads to more bad financial decisions in the short term when the credit reports (within their current form) are not to be (or should not be) really trusted anyway.

With capitalism being our mode of operation within America, there are thousands of corporations listed on the various stock exchanges that are propping up mismanagement and/or poor performance (within their primary line of business) by investing in companies that cater to people with poor credit ratings.

No individual or company with a high Standard & Poor's rating is found liable for society's woes when they invest in smaller companies using various names that charge people through the nose until the person chooses a bad credit report for a limited period of time versus paying extortion fees of interest in order to keep a good, clean credit report.

People with bad credit are charged astronomical interest rates bottom line. The additional profits from the higher interest rates sustains weak performance by the corporation within its other divisions and endeavors.

So whenever you read an article or hear a news report about identity theft and credit reports, know that someone somewhere is making more money as a result (in ways both legally and illegally currently).

The only real difference this time around is that there is a greater transfer of wealth taking place nationwide in declaring more people to have bad credit (or supposedly become victims of identity theft).

As more credit reports are suddenly declared poor, bad, and/or high risk, it is seemingly the only way for many corporations to keep their stock values and the overall expectations and hope of our nation high enough to prevent anarchy from taking place.

No wonder the income and wealth gap within America is increasing more than it ever has in the past.

But then again, the companies that rushed to declare their own customers a bad credit risk now face a dwindling pool of customers willing to buy from the company ever again (since the overall birth rates are not skyrocketing as the number of people who are now bad credit risks are). There are also not enough customers on the internet worldwide willing or able to do business with companies that were once local in nature only.

This is why local stores of various chains have to close and why companies go bankrupt altogether. For example, what furniture store you know of has been in business for more than 20 years?

Sears is proably one of the few businesses that sell have sold furniture for an extended period of time. The reason that Sears stays in business is that it is one of the few willing to forgive a customer in order to generate a future sale.

I wonder if Wal-Mart, eBay, Amazon, Yahoo, and other household brands have been financing many people with their various entities with high interest rates?

Whenever a well known company decides to provide credit in order to stimulate future sales, there is going to be a longer term negative effect as those who later declared to be bad credit risks start failing to pay other companies that they owe because company A suddenly declared them to be a high risk.

Is there a solution? There are several.

One potential solution is that more variables of a short, medium, and long-term nature should go into the decision to grant credit.

There are variables that have been removed in the past from credit applications (and it is illegal to ask a potential or present customer these questions) in order to grant women and minorities the opportunity to buy items on credit.

More questions should appear on credit applications to determine whether a individual or family is going to be a good credit risk long-term (or until the debt is paid).

The recent changes to the bankruptcy laws are not going to reduce the risks but increase the number of years a person is held liable for paying their debts or better yet, limit the number of ways a person can get off the hook of paying a company back.

Attorneys are going to make the most money in the short-term as many people will file bankruptcy in the short term and then sort things out later.

I do believe that it will take a financial market meltdown and era worse than depression to really correct the system overall.

Another solution will be that credit limits will have to be lowered which ultimately would lead to a lower standard of living nationwide. I do not believe that this option would be chosen due to our current way of living.

A third solution is that more Americans will owe and more American based companies will be owned by more foreign investors and the current credit issues simply go global in nature and awareness.

A fourth and possibly more digestible solution is that a more personal approach will be implemented by companies who respect their customers and feel that we are all in this together. How a company might achieve this mindset is the million-dollar question.

Companies with billions of dollars in cash on their balance sheets might be able to grasp this concept while enduring the short-term hit on their stock value, but not many companies will be able to go this far.

Maybe credit reports should reflect the type of business being done with. An individual consumer doing business with a higher-grade company should be ranked higher than an individual consumer doing business with a company known to charge high interest rates and/or low stock or bond value.

Companies should be really evaluated by stock analysts whether the company has attempted to legally inflate its stock value by inducing more people with credit and eventually selling the bad debts to another company. Or better yet, give the companies less time to collect money owed to them or lower terms. Then companies would have to create products and services that would either last longer or have a lower cost overall.

The bottom line current goal of most corporations is to reach higher level of shareholder equity by investing in the debts of others. There are very few companies that invest within the equity of others. This is the unreached paradigm shift that America needs.

There is an opportunity for companies to be developed around the idea of either sustaining or replacing the commercial parts of the credit triad industry (customers, companies reporting to credit bureaus, and credit bureaus).

I am sure that more ways of extending and repairing credit will take place as the "buy here pay here" concept as firmly held its ground.

Arbitration (and immediate credit repair itself) should be possible even during the buying process. A company might finance a consumer's purchasing decision by really evaluating if mistakes were made and by which party before granting credit.

Another company seeking to be a credit bureau itself might declare (within its credit reporting system) a negative credit mark against a consumer's report null and void if the company reporting the negative mark has a history of penalizing customers with negative marks or inaccurate credit reporting or catering to consumers with bad credit reports.

This is America after all.

There is no reason that the dirty secret has to remain a secret---that is, unless the secret is profitable and serves the greater good of us all.

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