The credit reporting industry may have flaws, but it’s one we’re more or less stuck with.
one of the three main credit bureaus, sent faulty scores to millions of lenders, resulting in higher interest rates and denied applications, the Wall Street Journal reported this week. This follows a data breach by the same company in 2017 that exposed the personal information of 147 million people.
When credit bureaus report erroneous information about an individual, it potentially hampers that person’s ability to buy or rent a home, get an auto loan, open a new credit card, and even determines the rate they get on their insurance.
Given the credit agencies’ central role in Americans’ daily lives, it’s an extremely high-stakes operation.
“Experian, Equifax, and TransUnion keep files on around 200 million adults and more than 1.6 billion credit accounts”
Presently, the big three credit bureaus, Experian
Equifax, and TransUnion
keep files on around 200 million adults and more than 1.6 billion credit accounts, the Consumer Financial Protection Bureau said.
The government watchdog earlier this year released a report criticizing how the big three responded to consumer complaints, calling them an “oligopoly” that has “little incentive to treat consumers fairly when their credit reports have errors.”
Regarding the Equifax breach, the company said in a statement that it took errors in data “very seriously” and added that it was a “technology coding issue” between March 17 and April 6 that has since been fixed.
“As part of this extensive analysis, we have determined that there was no shift in the vast majority of scores during the three-week timeframe of the issue,” Equifax said. “For those consumers that did experience a score shift, initial analysis indicates that only a small number of them may have received a different credit decision.”
“Our data shows that less than 300,000 consumers experienced a score shift of 25 points or more,” it added. “While the score may have shifted, a score shift does not necessarily mean that a consumer’s credit decision was negatively impacted. We are collaborating with our customers to determine the actual impact to consumers.”
The three credit bureaus did not respond to MarketWatch’s request for comment regarding the CFPB’s categorization.
Alternative credit-score models
Several startups are coming up with alternative credit scoring models using artificial intelligence and data from your smartphone to extrapolate a borrower’s likelihood of repaying a loan. Your digital footprint could also be used for predicting consumer trustworthiness, according to a a 2018 study conducted by the Frankfurt School of Finance & Management.
But it’s hard to come up with an alternative model that covers millions of people over a sufficient period of time, and in an equitable and consistent manner.
Using income to assess creditworthiness is likely to work better for smaller loans, Mingli Zhong, an economist at the Urban Institute, told MarketWatch.
“But for mortgages or auto laws, these are large financial transactions, so I don’t think income is a very good measure,” Zhong explained, “because it’s less stable than your credit histories and your total savings and assets.”
Periods of recession could lead to you being laid off, which means you have $0 in steady income, yet your ability to repay loans may not change if you’re able to pick up odd jobs, for instance.
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