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The Credit Scoring System Needs a Major Overhaul

I live and work in New York City, where I’m president of a small business. When I go out to lunch or dinner, whether for business or with friends, people are often surprised to see me pull out a debit card—the same one I’ve had since I was a kid in middle school. I don’t have a credit card.

Fortunately, I make enough to live on. And like more than half of my generation, Gen Z, I have a side hustle (in my case, modeling). I pay my bills and save 20 percent of what I earn, which I know is rare. It’s what my parents taught me. According to surveys, 77 percent of U.S. adults have a credit card, although nearly a quarter of people who do have credit cards don’t use them.

During college, I saw that credit card companies advertise heavily to people my age (even when they’re not allowed on campus). I avoided the temptation, wanting to keep my spending in check. But I’ve also seen that there’s another reason so many people, including young people, turn to credit cards: We’re told that it’s important for building a good credit score.

We’re also told that we should start early, since a longer credit history improves your credit score. That score doesn’t just impact your ability to get a mortgage in the future. It can “affect every aspect of your life,” even the rates you pay for car and homeowners insurance, CNBC reported.

Sure, you can get a credit card and pay it in full every month—although, as Equifax noted, there are even times that paying off debt can lower a credit score. And just having a credit card makes it far too easy to stop tracking your finances and start overspending. It’s similar to the rise of the “buy now, pay later” market that could be worth $3.7 trillion by 2030.

While credit card debt is rampant, topping $1 trillion in the United States, Gen Z faces an especially tough battle. “Young adults are — and will be — paying an increasing amount of their disposable income servicing their debts, more than Americans in other age groups do,” The New York Times reported. There are several reasons, including higher borrowing costs and student loans. Many college loans are predatory, and I’m extremely fortunate that athletic scholarships, work during breaks, and parents who could afford college helped me avoid that trap.

Pressuring people to get credit cards in order to build up their credit scores is a trap of its own. People should be incentivized to avoid tools that tempt you to spend beyond your means. Choosing to live without access to consumer debt should help, not hurt, your credit score.

There are ways for people without credit cards to build up their credit histories—many require taking on debt. Experts recommend getting a car loan, personal loan, or “credit-builder loan.” You can try other things, like getting your rent payments considered, but that does not happen automatically. You have to sign up for a service and hope that the scoring company’s algorithm will include that information.

The people worst hurt by the current credit scoring system are those who simply can’t get by on how much they’re making, including those crushed by student debts and minorities who face systemic prejudice. This is why one idea being floated — to include “alternative data” such as educational history—would be unfair. As the Government Accountability Office noted, it could “cause the lender to discriminate against populations that traditionally have had lower college graduation rates.”

There is a lot of talk about the need to overhaul the credit scoring system. As part of this, I hope a new system will reward people who choose to avoid consumer debt. The scoring companies should take a more holistic view of individuals, their records, and their finances, rather than putting individual criteria stripped of important context in a vacuum.

I also want to see another societal change that could go a long way in taking on this problem: efforts to educate future generations about how financial tools work. “Financial literacy tends to be low across generations, but particularly so among Gen Z,” a study by the TIAA Institute and the Global Financial Literacy Excellence Center found earlier this year.

When the credit scoring system is transformed to reward saving money and financial literacy becomes a staple of the education system, people across the country will be in a smarter, stronger position—and less likely to be overwhelmed by crippling consumer debt.

Cole Clark is president of AmygdaLaunch.

The views expressed in this article are the writer’s own.

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