CREDIT SCORES AND CONSUMER REPORTING AGENCIES

SURVEILLANCE AND THE VICIOUS CYCLE OF DEBT

Imagine being tracked 24/7 by an invisible network, then classified and ranked according to a secret formula. Imagine your "file" was full of inaccurate and discrediting information, yet it was being sold to critical decision-makers and used to compute a numerical ranking which determined your ability to access the basic necessities of life — a roof over your head, basic utilities, even a job. Imagine this (low-ball) number turned out to be a self-fulfilling prophecy, sealing your fate in a financial caste system.

These are the basic dynamics of the system of surveillance and control known as "consumer reporting." Over 90% of the adult population is somehow entangled in the "dragnet," yet few know precisely how — it's hard to keep track. Consumer reporting agencies (CRAs, or simply "bureaus") gather, organize, and standardize consumer data — how we pay bills, how much money we owe, where we work and live, whether we've been sued, arrested, or filed for bankruptcy — then sell the information to creditors, as well as employers, insurers, and increasingly to consumers themselves. The "Big Three" — Equifax, TransUnion, and Experian — have long dominated the consumer reporting industry. Often labeled the "national credit bureaus," they are actually global corporate conglomerates, which source labor and operate in markets around the world. (Experian isn't even based in the United States, but in Ireland.)

CRAs play a crucial role in our ability to access even the basic requirements of life in our society. A survey by the Society for Human Resource Management found that almost 60% of its member employers used credit reports to screen applicants for at least some of their positions. Credit scores also frequently factor into insurance rates — approximately 92% of auto and home insurers rely on them, according to a survey in 2001. Alarmingly, hospitals have begun using credit scores to determine access to health care and to set costs. This chapter guides you through the consumer-reporting matrix, but also questions many of its basic assumptions and standard operating procedures. Decades of industry surveillance and control — often with government assistance or approval — have steadily transformed our culture, altering our values and behavior and generally instilling financial obedience.

Today, credit scores are treated as a measure not just of our crediUvorthiness but of our all-around personal integrity. Low scores virtually guarantee punishing credit terms and ruinous cycles of debt. And because someone won't have a credit score unless they use credit, it penalizes people who do not use credit products. Hence, it gives a boon to the widespread use of credit and propagates debt relations. People no longer have a choice of whether to use credit or not. But even "good" behavior cannot guarantee high scores in our systematically flawed consumer reporting system. Financial surveillance is a corrupt and impersonal machine, not a system that genuinely determines people's trustworthiness. Can't make a credit card payment because of health costs this month? It's recorded. Got laid off and couldn't pay tuition? It's recorded. Tried to pay a mortgage fee with an already-low checking account? It's recorded.

The fact that the credit reporting and scoring system is set up to maximize profits for the corporations involved instead of helping consumers is leading more and more people to consider alternatives. Thus, in addition to suggestions for individual "self- defense" and collective "harm reduction" in the context of the current credit regime, the chapter also offers ideas for moving outside or beyond it.

THE CRAINDUSTRY

Operating much like a typical oligopoly, credit reporting in the United States has long been dominated by the Big Three of Equifax, TransUnion, and Experian — with combined revenue of more than $6.7 billion in 2009. More recently, two different firms — Innovis and CoreLogic — have been given the distinction of the "fourth" CRA. Collecting "supplementary credit information," they represent the biggest "specialty" CRAs, companies which compile reports about much more than credit history, for example, medical history, employment history, rental history, checking account history, auto and property insurance claims, and utility bill accounts. These other non-credit reports are proving to be just as influential as credit reports; yet, even less is known about specialty CRAs than about the notoriously obscure Big Three, not to mention the shadowy connections between them.

CRAs started in the 1950s as regionally based companies that would track the publicly available details of your life — when you got married, if you got a speeding ticket, or if you committed a crime. CRAs have persistently drawn criticism for mishandling data and violating privacy; protest grew more intense and organized over the course of the 1960s. There was mounting evidence that credit — files were riddled with errors and that they were being sold indiscriminately, to practically anyone who requested them. Columbia University professor Alan Westin became a vocal critic of industry practices after reviewing a sample of files from Equifax, which at the time went by the name Retail Credit Company. According to an article he wrote in 1970, Westin discovered "'facts, statistics, inaccuracies and rumors' ... about virtually every phase of a person's life; his [sic] marital troubles, jobs, school history, childhood, sex life, and political activities." The looming computerization of credit files, which were increasingly concentrated in the databases of a few newly "national" CRAs (or NCRAs), led to the 1970 passage of the Fair Credit Reporting Act (FCRA). Setting regulations on the collection, dissemination, and use of consumer data, the FCRA was the first federal law to implement privacy protections in the private sector in the United States.

The expansion of retail credit and major innovations in informational technology led to a consolidation of the industry in the early 1970s, which meant data became shared across industries. (Up to that point, companies could only compile information about a particular type of credit, like your regional banking history or your mortgage.) CRAs saw rapid growth in the 1970s and 1980s with the proliferation of bank credit cards, and in the 1990s with the automation of mortgage underwriting.

Today, each of the Big Three has credit files on over 200 million adults and receives information from approximately ten thousand furnishers of data, including banks and finance companies. Every month, furnishers report on over one billion consumer credit accounts and other types of accounts.

The informational structure generated by consumer reporting is the basis of today's credit-oriented consumer economy and a primary means of statistically defining and differentiating the population. Its networks span across financial service providers, retailers, insurers, telecom and utility providers, and transportation companies. This data is increasingly used to determine our access to the basic necessities of life. Landlords use credit reports and scores for screening rental applicants, as do employers for job applicants.

A tremendous amount of power over the daily lives of people is given to profit-driven entities that, until recently, operated almost entirely outside of public oversight. In July 2012, the Consumer Financial Protection Bureau announced that it would become the sole federal regulator for thirty credit reporting agencies that account for 94% of the credit reporting market. (Previously, the industry was only subject to occasional congressional oversight and the restrictions of the FCRA.) But CRAs have already amassed huge amounts of sensitive data and their business is selling it as widely as possible.

CREDIT REPORTS AND CREDIT FILES

Credit reports are reports provided by CRAs to lenders and other users. They factor critically in decisions to grant credit for example, mortgage loans, auto loans, credit cards, and private student loans — and in other financial spheres, including eligibility for rental housing, setting premiums for auto and homeowners insurance in some states, and job hiring. Consumer reports, which include other information in addition to credit activity, are reports by a CRA "bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living." They are used to determine a consumer's eligibility for credit or insurance, for employment purposes, or other purposes specified in the FCRA.

Credit reports are based on "credit files," information about a consumer contained in the databases of the NCRAs. Credit files have some or all of the following components:

1. identifying information such as name (and other names previously used), current and former addresses, Social Security number, date of birth, and phone numbers;

2. trade lines (accounts) in a consumer's name reported by creditors, including type of credit, credit limit or loan amount, account balance, payment history, delinquencies, collections, and dates of activity;

3. public record information of a financial nature, including bankruptcies, judgments, and state and federal tax liens;

4. third-party collections by debt buyers or collections agencies; and

5. inquiries in the last two years for employment-related uses and for at least the last year for credit uses and most non-employment uses (e.g., tenant screening, insurance, government benefits).

Examples of important information not contained in credit files include: income or asset data, credit terms such as interest rates, records of arrests and convictions (but specialty CRAs such as employment screening agencies include them), marriage records, adoptions, and records of civil suits that have not resulted in judgments.

CREDIT SCORES

Credit scores are mathematical models that input a consumer's bureau credit report and output a number that is called a "credit score." The most common scores range from 300 to 850. The higher the number, the less likely a consumer is to default, and hence makes a better credit risk for the lender.

A credit score is used by a bank or financing company to decide whether to lend to someone, and at what interest rate. Because banks say that interest is charged partly to make up for the chance of default, people with lower credit scores end up paying higher interest rates. Usually, scores below 660 are considered "subprime," and consumers with such scores will be denied credit or given credit on bad terms. Consumers with scores above 720 will get the best interest rates.

Banks use credit scores to make their lending decisions because the CRAs have a consumer's entire credit report, including accounts from other banks. This gives more information than just the bank's internal data. Banks also use credit scores because the ease of using the algorithm, or mathematical formula, allows banks to implement strategies quickly. The fact that a consumer is reduced to a three-digit number allows them to pull large batches of credit scores and treat people based on that factor alone. However, for major lending decisions with high potential losses, such as a mortgage, banks will use additional factors, such as income verification, down payment amount, and an assessment of other debt obligations.

Types of credit scores

There are many variants of credit scores, making it difficult for a consumer to navigate through them. Credit scores have two main components: the data that goes into the score, and the scoring algorithm itself. Equifax, TransUnion, and Experian are the three main providers of data. There are many different providers for the scoring algorithm, the most famous being FICO, and the credit bureaus themselves. When you encounter a "credit score," it is important to denote which bureau the data in the score came from and what algorithm is used. Different algorithms use different score ranges, which can further confuse consumers. Below, some common examples of scores are noted and explained.

FICO score

The FICO score's range is 300–850, and the median score is about 720. Experts agree that if your score is above the median, you will have access to the best rates.

The FICO score is created by a publicly traded company called FICO (formerly known as Fair Isaac Corporation) founded in 1956. Because they have been around for so long and have patented their algorithms, FICO enjoys a near monopoly in credit scoring, boasting that an overwhelming majority of lending decisions in the United States are made using the FICO score.

FICO, as a company, does not own any data from which it creates the credit score. FICO is not a CRA; they only create statistical algorithms. FICO "borrows" data (through complicated contracts) from the bureaus for the sole purpose of creating the algorithm. This algorithm is then encoded into a black box and placed at each of the Big Three bureaus, none of which know the contents. When lending entities, such as banks or cell phone companies, want a FICO score, they ping an inquiry to the bureau with which they have a relationship. The bureau runs the person's Social Security number to retrieve information from their database. That information goes through the black box algorithm, and out comes a score which the entity receives. The money made from that transaction is split between FICO and the bureau that provided the information.

Because there are three different bureaus that can provide information, there are three FICO scores. Because different banks use different bureaus, and some banks use all three, all the three scores can affect lending decisions. What compounds the confusion is that FICO uses different branding with different bureaus, so the score names can vary. If you see that you received a BEACON score, it means that you received a score with a FICO algorithm and Equifax underlying data. "Classic" refers to TransUnion, and "Experian/FICO Risk Model" to Experian.

For each bureau, FICO creates other scores specially calibrated for different purposes, such as the Auto Industry Option FICO score. The algorithm in that score is customized to predict only default in autos, instead of default in any line of credit. When someone gets a car loan, they think they received a FICO score, but it most likely isn't the one that would be used to give them a credit card or mortgage. Also, there is no way for the public to get these custom industry score options; only auto dealers with special contractual relationships can get these scores. Other specialty industry option scores include mortgage and bank card.

Finally, because FICO has been making scores for decades, there are many different versions of the same type of algorithm. The newest algorithm is called FICO8, but many banks still use an older version. Consequently, two different banks may pull the same FICO score type from the same bureau, and still get different scores.

There are approximately fifty different FICO branded scores a consumer can have. FICO allows you to check your general FICO8 score for all three bureaus on myFICO.com for an extremely hefty fee of approximately $60. The only other option is to get the score is from your lender.

VantageScore

Experian, Equifax, and TransUnion got together and developed the VantageScore algorithm as a response to the FICO score. Its current range is 300–850, although it used to be 501–990. They own their own data and don't have to share revenue with FICO for the score. FICO still dominates the space of scores that are used for lending decisions, but the VantageScore is used often in companies — such as Fitch and Standard & Poor's — to assess portfolio risk, since this score is cheaper. Due to differences in algorithms, VantageScore and the FICO score can differ quite dramatically for certain people.

TransUnion and Experian offer their VantageScore to consumers through their websites for a fee. Credit Karma also offers the TransUnion VantageScore for a fee, but it doesn't have to be paid if subscription is canceled within seven days. There is no way for a consumer to get the Equifax VantageScore.