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Consumer education needed when it comes to credit

Apr 02, 2013 Sean Albert

Consumer education needed when it comes to credit

Having a strong credit score is essential in modern society. Many important purchases that consumers make require having a relatively clean payment record, including buying a home, leasing an apartment and acquiring a car. Without enough high-quality data backing an individual, he or she may be unable to make many crucial transactions. As more Americans find themselves in debt, it may be time for people, along with their financial services providers, to get educated, and for the alternative credit report to make its way into popular use.

Knowing how credit works is crucial

As many debt collection agents likely know, a lot of consumers are unsure of how credit works, even if they are already using it to make important purchases. Forbes recently noted that the Consumer Financial Protection Bureau (CFPB) may be missing out on opportunities to prevent delinquencies, and that taking steps toward educating the population may be one way forward.

Stephanie Eidelman, president and publisher of debt collection news website insideARM, wrote that from her perspective as a parent and industry professional, the CFPB could do well to catch children early on. She explained that her children, ages 6 and 7, have been curious about what credit means, and that after explaining how it works, she saw a shift in their thinking. When Eidelman's daughter asked her to make a purchase on her credit card, Eidelman's son stepped in to remind his sister that paying with credit means having to pay with real money later.

As someone whose line of work revolves around helping debtors get back on track, Eidelman suggested that making these impressions on kids as early as primary school could change the way credit accounts are handled. Many adults still struggle with separating the temptation to pay now and worry later from the very real possibility of economic hardship.

Debt collection agencies should take note - while it may not always be immediately apparent, these businesses are in the customer service industry. One way to better serve debtors could be to not only help clear up debt, but to help debtors figure out how to prevent credit problems in the future. This would likely turn out to be valuable for individuals with a history of delinquency. While early education could help, it's never too late to learn.

Alternatives to debt
While Eidelman focused on teaching others about how traditional credit works, the trend toward using alternative credit score sources may be an important one for enterprises, lenders and consumers alike. Alternative credit scores don't just take into account a consumer's credit history, they measure metrics such as how reliably a person makes rent and utilities payments, among other recurring financial obligations. These new methods are gaining steam, as they not only give the public expanded opportunities to take advantage of a range of financial services, but they keep lenders safe by supplying them with reliable intelligence on potential borrowers.

Not only are many consumers undereducated when it comes to the true meaning of credit, but they may also not be as aware as they should regarding alternative methods. Often, consumers take out lines of credit because they feel it's required to set themselves up to be eligible for a loan or a purchase, while this isn't always true. They may be able to avoid debt altogether by using transactions they make in their daily lives to build up the history they need. For lenders and business owners, it may be worthwhile to support alternative credit, as well as develop plans to make customers aware of their options.