PROTECTIONS PROVIDED BY THE FAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act went into effect in 1971.  It was a direct response to the subjective and biased methods used by lenders at that time.  Credit extension decisions were made based on factors ranging from the perceived cleanliness of applicants to their assumed sexual orientations.  You don’t need to be a paranoid hater of “The Man” to see where a system like that could be more than fertile for discrimination.

Regulating the credit industry with the FCRA seemed to work fairly well.  Decisions were made more objectively and the potential nastiness of making lending determinations based on the kind of  “immutable characteristics” that are the basis for most civil rights protections decreased.

Thirty years later, we took another positive step.  In 2001, an updated FCRA gave consumers the ability to easily access their credit scores and information.  Finally, it seemed like we were operating in the sunlight.  We could find out why we were or weren’t able to get certain credit cards, car loans or mortgages.  Further refinements even allowed us to access a free credit report on an annual basis.

Not only did this change give consumers a chance to detect potential errors and inaccuracies.  It also provided them with the information necessary to begin taking actions to improve their credit ratings.  If one could break the 700 mark on their FICO, they could feel relatively comfortable in their ability to get decent deals on loans.

So, things are better today.  Maybe.  We really don’t know.

SECRET SCORES AS A WAY AROUND THE FCRA

We’re ostensibly functioning in an open environment where critical information is readily available but all of those reports and scores may not really provide us with what we need to know.  That’s because credit card companies and other lenders aren’t necessarily using the data on those reports to make decisions the way we’ve been led to believe they are.

Instead, credit decisions are being made based on “secret credit scores” that aren’t publicly available.  Credit card companies and other lenders are collecting and mining as much data about us they possibly can and their using all of that information to create scores that influence the way they treat us.

Those “secret recipes” and the numbers they create aren’t part of your regular credit report.  They’re proprietary information owned by the lenders.  They own the formulas.  They own the data.  You don’t get to see those scores.

These scores can take many different forms.  In a must-read MSNBC article, Liz Pulliam Weston breaks down eight of those scores, neatly encapsulated in a post at Get Rich Slowly:

Your response score predicts how likely you are to respond to an offer of credit, such as a credit-card offer in the mail.

Your application score contains secondary information that’s not factored into your credit score. This is like a reinforcing piece of information.

Your bankruptcy score is just what it sounds like: a measure of how likely you are to declare bankruptcy.

Your revenue score indicates how much money a lender is likely to make from you as a borrower.

Your attrition-risk score measures how likely you are to close your account. Lenders use this in combination with other scores to decide whether a customer is worth retaining.

A behavior score is like a credit score, but applies to only one account. Each account has a behavior score, which reflects how you handle the account.

A transaction score is generated for each purchase you make, and is used to determine whether the transaction should be approved. (Or whether it might be fraudulent.)

If any of your accounts is sent to collections, your collection score predicts how likely you’ll be able to pay your debt.

While these numerical representations of our creditworthiness are top secret information and we’ll never really know when and how their used, we have every reason to believe that they play a substantial role in the kinds of credit card opportunities you may have and the rates the lenders offer you.

IS IT TIME TO STOP THE SECRETS?

Does the utilization of secret scores represent a return to the pre-FCRA days of biased decision making and potential discrimination?  One would like to believe that isn’t the case.  The numbers derived from the data collected by lenders should be processed in an objective way, free of discrimination.  It’s highly unlikely that lenders are making determinations based on whether you’re like Rob or Roberta.  The color of your complexion shouldn’t be a variable in their algorithm’s assessment.

However, we don’t really know that.  It’s possible that the data miners have found ways to correlate certain behaviors with certain traits and that lenders make decisions on that basis while hiding behind an apparent statistical screen of objectivity.  Even if that isn’t the case, the use of secret scores certainly represents a retreat from the principles governing credit decisions for the last 40 years.  As CreditLoan states:

Legally, credit bureaus have been required to provide credit scores to inquiring consumers at a reasonable charge. However, the law has no stipulation that the information provided to lenders is the same that is provided to consumers. The reality today is that factors in your credit history can be used against you when you don’t even know they exist!

While the new Credit CARD Act contains numerous regulatory provisions for lenders who are in the business of issuing credit cards, it doesn’t tackle the use of secret scores.  There’s no other significant legislation on the horizon, either.

Thus, for the time being, all we have to work with as consumers are reports that may or may not actually provide us with a clear indication of our creditworthiness.  We’re flying blind again, just like we were in the 1960s and before.  Considering the impetus behind the FCRA, I think it makes sense for more disclosure and oversight with respect to these magic numbers.