Cross-posted from New Deal 2.0.
It's pretty much common knowledge that one of the biggest reasons to get a credit card is that it helps boost your credit score. When I tell people that I don't have a credit card, that's the first thing they point out -- that I will have a lower score than someone who has a card and pays his or her bills on time. (Although I'll still have a higher one than someone who carries a balance.) As wages fell and consumers took on more debt to compensate, credit scores have become more and more important, as they are a large part of determining a borrower's creditworthiness. They now even factor into things like job applications. But who is in charge of these scores and how are they determined? The answer isn't easy to come by.
The importance of these scores can't really be overestimated. Ninety percent of banks use credit scores when they determine finance charges such as interest rates on mortgages and other loans. But it doesn't stop there -- potential employers, insurance companies, landlords, and a host of others use these scores as well.
A lot of scores contain errors. Studies that attempt to estimate how many report numbers from 3% of scores to 25%. Even an industry-sponsored study found potential errors in 19.2% of reports (although it claimed that less than 1% of them had disputes that would result in a meaningful increase in scores if settled). As the New York Times reports, these are significant numbers. "Even 1 percent translates into millions of consumers, since there are at least 200 million files at each of the bureaus," it says.
And trying to correct these errors isn't easy. Unless you're rich or powerful, of course. The Times recently reported that the three major agencies, Equifax, Experian, and TransUnion, have a "V.I.P." list of "celebrities, politicians, judges and other influential people" who get special help from United States-based workers in fixing mistakes on their reports. The rest of us riff raff get thrown into an automated system in which our complaints are usually sent overseas, "where a worker spends, on average, about two minutes figuring out the gist of the matter," the Times says. Little is usually done in response to the complaints.
Meanwhile, the very methodologies used to calculate these scores are a close-held industry secret. As John F. Wasik of Reuters puts it, "You have better chance of reading classified U.S. State Department cables on WikiLeaks" than finding out how they create credit reports. Scores are usually determined by how much credit you use, whether you pay on time, and whether you use credit cards, but "only a handful of employees at the Minneapolis-based Fair Isaac Corp. [FICO] know and won't tell you -- or government regulators," Wasik says.
And beyond all of this, the private companies that collect the data used to create scores are poorly regulated, in large part because the Federal Trade Commission, which is supposed to oversee them, lacks broad authority. All that might change once the CFPB is up and functional. A little sunshine on this industry could go a long way.
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