Series: How Your Credit Report Information Is Being Used

In my last two posts, I’ve explored a lot of what you might want to know about credit reports, credit scores, and what all of this means for you as a consumer. Now, for the grand finale of posts on credit reports (exciting stuff, right?)! There are an ever-increasing number of ways your credit report is being used beyond credit scores. I want to dig into some of these ways that will benefit you – and others that you should be skeptical of.

Let’s start with the good.

 Several startups have come up with clever ways to use credit reports to benefit the consumer:

Cinch will use information from credit reports with consumer permission in combination with other data points to function as the first autonomous personal financial manager to optimize your entire financial life – everything from how to pay off your debt more quickly to making sure you have the best cell phone data plan to never overpaying for car insurance again to knowing exactly how much to set aside each month, realistically.

NEFT plans to build a consumer-facing platform where borrowers can enhance the credit score derived from their report in real-time. It can be problematic that it takes several days before a mistake that you fix on your credit report is corrected, or that a consumer can only see their credit score improve if they’re paying off overdue amounts after a long period of time. With NEFT’s arrangement, lenders are willing to work with consumers who are improving their financial health, and borrowers can see how paying off debt can help them because of a responsive credit report and score.

ZestFinance: The company decided to use choice information from consumers’ credit reports, data on consumers from social media and data on how people use cellphones to make credit decisions. Their claim is that a traditional credit report is archaic. Information on consumers’ personality traits also play a role in creating a risk profile, which is why they include these other types of data when deciding who to extend credit to. ZestFinance says they’ve seen a 40% decrease on default rates when using all data sources to extend credit as compared to the traditional practice of using only the information from a credit report.

Now for the bad news;

 Despite the many useful ways your credit report can be used, there are some ways it might be used that you should be wary of. With the use of predictive analytics seeping into finance, companies are now also silently calculating summarized credit statistics. This report comprehensively describes how these can alter our lives in the future. Credit statistics are one of the primary ways credit reports are being used that many consumers are not aware of.

Summarized credit statistics, are consumer credit data aggregated across a geographic area (usually a zip code). Hundreds if not thousands of variables are used to predict these group outcome variables, and target groups for marketing purposes. So, what’s the big deal? The Fair Credit Reporting Act and Equal Credit Opportunity Act protect individuals – as in how your credit score is calculated – but not groups – as in summarized credit statistics. This table gives you a more detailed summary:

 

Question

Credit scores Summarized Credit Statistics

Can race, marital status, religion, etc. be used to derive scores?

No Yes, due to lack of regulation.
Can the scores be used for general marketing purpose? No

Yes, and it often is.

Can consumers see their scores?

Yes. It’s mandated that consumers can access a free copy once every 12 months.

No. There is no way for consumers to see what summarized credit statistics are being used to type and target them.

Do consumers know what factors go into their scores?

More or less, although this is not a perfect process. Consumers also have an opportunity to fix their credit report if there are errors.

No. There is no transparency into the inputs that go into these models. Therefore, consumers also have no opportunity to assess the accuracy of the inputs.

 

A little scary, right?

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