Last updated June 17th, 2019.5 minute read
I check my credit report pretty religiously on Credit Karma. Why do I check it so frequently, you? Ohh, I’m not sure. I’m bored? I’m a nerd who actually finds it kind of fun to track? Yeah, both of those reasons are pretty accurate.
One of the items on your credit report is derogatory marks:
I never paid much attention to this item – probably because, as you can see, I don’t have any on my credit report.
And while this item is fairly self-explanatory based on what you see in the above box, I wanted to know more.
Credit Karma’s full definition of derogatory marks is:
Derogatory marks are negative, long-lasting indications on your credit reports that generally mean you didn’t pay back a loan as agreed. For example, a late payment or bankruptcy appears on your reports as a derogatory mark. These derogatory marks generally stay on your credit reports for up to 7 or 10 years (sometimes even longer) and damage your scores.
As I read this definition, I couldn’t help but immediately think of the economically disadvantaged.
Here’s the thing – yes, it is entirely possible for someone who has the means to avoid financial disaster to get into that situation anyway. That could be caused by reckless spending, addiction, some major life event such as a sudden and unexpected health condition (especially in the US), and so on. And while I never like to play the blame game, at least the aforementioned people had some way to avoid financial disaster.
But what about the poorest of the poor?
Covering Basic Expenses
It’s one thing if someone destroys their credit rating through irresponsible spending on lavish items he/she doesn’t really need. But in reality, not everyone racking up credit card bills is using them solely for this purpose.
For example, according to Value Penguin, consumers are 25% likely to use credit cards to cover recurring expenses.
Sure, that’s well below online shopping, travel, and how likely consumers are to use credit cards overall, at 48%, 47%, and 44%, respectively. Still, given the steep interest rates on credit cards, it seems feasible that a low-income person could fall down a slippery slope.
Riskier Lending = Higher Interest Rates
One thing is for sure: “low and moderate income” (LMI) people rely on credit cards more heavily. That is according to a paper from Columbia University which reported on this topic.
Credit Card Debt
NPR has been covering payday loans quite a bit recently. They note that payday loans are often rolled into another loan. This is especially problematic because it causes the costs to spiral out of control. And since payday loans typically target the poorest of the poor, it’s likely those people would be unable to pay the loans back on time.
One of the biggest reason payday loans have been in the news a lot recently is due to a proposed change to consumer protections. As NPR reported, a rule created by the CFPB under the Obama administration would have made it more difficult for people to get payday loans.
Under the proposed rule, lenders would have to show that borrowers could pay back the loans as a stipulation for borrowing. But the rule never took effect, and the CFPB under the current administration looks to take the rule off the table completely.
I think it is fairly self-explanatory why not having to prove a borrower can repay their loans is potentially dangerous.
What can we do about it?