Scoring The Invisible Consumers Is Harder Than It Looks

When asked, a majority of Americans can still remember what their SAT score was 20 years ago, despite the fact that SAT scores become precisely useless once one has been admitted to college.

What most Americans could not tell you — and by most we mean 58 percent — is their credit score. Only 42 percent of Americans know their credit score — despite the fact that that particular three-digit number decides if one can get a mortgage, how much they will pay for a car loan, what types of credit cards they can get and whether or not their utility provider will charge them a deposit to turn on services. Second only to a Social Security number, a credit score might arguably be the single most influential number in most consumers’ lives.

And while it is easy to beat up on consumers for not being on top of their credit profile, it is not nearly so easy to be on top of the information as one might imagine. First of all, consumers have more than one credit score.

The best known is the FICO score compiled from information in consumers’ credit reports issued by the big three reporting agencies — Equifax, TransUnion and Experian. The FICO score is also the most widely utilized, regarded as the “go-to score” in an estimated 90 percent of underwriting decisions.

However, since 2007, FICO has not been the only name in the game. There is also the VantageScore, which was developed by Experian, TransUnion and Equifax as a FICO competitor. VantageScore uses a similar scoring range to FICO (350–850), derived from the same credit report data, but uses its own proprietary algorithm to score and rate consumer credit.

VantageScore also claims to use more diverse data sources in its scoring and is reportedly able to score a wider swath of consumers as a result. FICO disputes this claim.

And while that debate simmers on, credit scoring does have a growing inclusiveness problem — namely the tens of millions of Americans for whom the current system can’t produce a score.

“If you think about the credit-invisible population in this country, their ability to enter the financial mainstream and access affordable credit instead of payday lenders and pawnshops and check-cashing services is tied to what’s in their credit report,” said Michael Turner, president of the Policy and Economic Research Council. “They’re caught in the credit catch-22: In order to qualify for credit, you have to have already had credit.”

And while there a lot of ideas bandied about, there are actually no silver-bullet solutions for the credit catch-22. There are areas where progress could be made — but not without costs.

So, Why Not Just Use More Data?

The frequent complaint on credit scoring is that it essentially takes a too narrow and backward-looking view of customers’ financial lives to make decisions about financial responsibility going forward. Credit reporting agencies focus on data from credit card companies, banks and other large lenders about whether or not borrowers pay on time. So, for customers with credit cards, mortgages and car loans, no problem. They are very visible and highly scorable.

But for customers who deal in debit, own their car (or stick with Uber) and rent, there is almost no data about them. Or, what’s worse, the data that comes in is negative more often than not — a utility or medical bill that went into collections, for example — and so it causes catastrophic damage to a score that would otherwise not exist.

Consumer advocates note this system is unfair because it is inherently tipped toward keeping a number of people, including millennials, out of the mainstream credit markets — even if, by all indications, they are financially responsible enough to pay everyday bills, such as rent and phone coverage.

“The way scores are calculated definitely privileges individuals with capital in a different way than working-class individuals,” Darrick Hamilton, an economist and professor at the New School, said.

Which means those consumer advocates think one simple solution is to simply open up the data set that goes into a credit score. Known as “full-file” credit reporting, this system would allow landlords, utility companies, phone companies and a host of others to report payments to credit agencies.

“This is a simple solution that won’t cost the government a penny, that builds on an existing framework and can be implemented almost immediately,” Turner said. “I can’t think of a more gift-wrapped social and economic policy that should have broad bipartisan support.”

Of course, as is often the case with financial inclusion plans, not everyone likes the wrapping.

The Trouble With Full Files

While most consumer advocates like the idea of opening up the fuller financial picture to credit scoring considerations, at least a few have paused to note that there might be some unintended consequences inherent to the plan. This might help some people establish credit or help others boost their scores. But it also runs the risk of depressing scores — particularly for people who maybe let their electric bill go a little bit late from time to time.

“We’re concerned that this push toward full-file utility credit reporting, on a monthly basis, will result in a lot more negative information,” said Chi Chi Wu of the National Consumer Law Center (NCLC).

Wu noted that the NCLC isn’t opposed to full credit reporting in general but that some pieces of data might be better given to it than others. Rent payments, she noted, are promising. Utility payments might not be.

When In Doubt, Get The Government To Do It

There is also a school of thought that the problem with credit scoring isn’t the models; it is the for-profit companies that do the scoring.

The New School’s Hamilton argued that credit scores should instead be the federal government’s job.

“The intent of credit scores is to provide information and facilitate markets. That’s something the private sector shouldn’t be doing,” he said.

The government, Hamilton suggested, would have a more clear mandate to be accountable to borrowers and upfront about its practices.

The problem, noted Turner, is that governments have shown absolutely no interest or facility for this sort of thing. He also noted that there isn’t much reason to think they can do it better.

“We don’t see any cases globally where you have an optimally functioning public credit registry,” he said. “They’re not really attuned to the needs marketplace. They’re not innovative. They don’t make investments in relationship-building with lenders. They don’t make investments in alternative data scoring models. So, there are real questions about the social and economic efficacy of a public credit registry.”

The Developing Problem

Consumers need credit scores, and since one of the elements that goes into determining a score is length of credit history, generally speaking, developing one early in life is preferable — but difficult. Since 2009, with the passage of the CARD Act, Americans under 21 can’t get credit cards without proof of income or a cosigner.

The number of credit cards that accept users with cosigners is declining. Discover just ended the practice, joining BoA, Chase and Amex. Getting that first card is now harder than ever, and without it, it is hard to get the mortgage and car loans that come with strong credit.

Can’t get a credit score without credit — can’t get credit without a credit score. The catch-22 persists and stymies financial inclusion for as long as it does.