Home > Articles > Business & Management > Finance & Investing

This chapter is from the book

Credit Controversies

Controversies over credit scoring continue to rage. Here are just of few of them.

Credit Scoring’s Vulnerability to Errors

No matter how good the mathematics of credit scoring, it’s based on information in your credit report—which may be, and frequently is, wrong. Sometimes the errors are small or irrelevant, such as when your credit file lists a past employer as a current employer. Other times the problems are significant, such as when your file contains accounts that don’t belong to you. Many people discover this misinformation only after they’ve been turned down for credit.

The credit bureaus handle billions of pieces of data every day, so to some extent errors, outdated information, and missing information are inevitable—but the credit-reporting system often makes it difficult to get rid of errors after you spot them.

The rise in automated lending decisions means a human might never see your application or notice that something’s awry. The explosion in identity theft, with its millions of victims a year, means more bad, fraudulent information is included in innocent people’s credit files every day.

Patricia of Seattle, Washington, tells of the ongoing horror of becoming a victim:

  • “I’ve always been careful about protecting my identity. Unfortunately, when I was trying to purchase a home, the real estate broker, to whom I’d given my application with birth date and Social Security number, had her laptop stolen. My worst fears came true when, four months later, I suddenly had creditors calling me like crazy asking why I wasn’t paying on accounts that were just recently opened in my name. On top of this, I learned the criminals had also stolen my mail with preapproved credit cards. This has created a nightmare of time, work, and frustration trying to clean up my credit history. It’s been over two years now, and I’m still working with the major credit-reporting agencies as we speak.”

Credit Scoring’s Complexity

You’re being judged by the formula, so shouldn’t it be easy to understand and predictable? Not even credit-scoring experts can always forecast in advance how certain behaviors will affect a score. Because the formula takes into account so many variables, the best answer they can muster is, “It depends.”

The variety of different scoring formulas and different approaches among lenders can confuse matters even further.

Lenders can get scores calculated from different versions of the FICO formula, as well as formulas that have been modified for auto or bankcard lenders, for example. They also can have in-house formulas that incorporate a FICO score along with other information that might punish or reward certain behaviors more heavily than the FICO formula does on its own. Some call the result a FICO score, even though that’s not technically correct.

Not surprisingly, this causes confusion for consumers and mortgage professionals alike.

A. J. Cleland, an Indianapolis mortgage broker, discovered how different scores could be when trying to help a client who had been turned down for a loan by a bank. The bank reported the client’s FICO score was 602, whereas the FICO score Cleland pulled for the client—on the same day and from the same credit bureau—was 31 points lower:

  • “I called my credit provider and was informed that there are different types of reports and different scores,” Cleland said. “I thought your score was your score, period.”

Credit Scoring’s Use for Noncredit Decisions

I mentioned earlier that many businesses might check your credit and your credit score when evaluating your application; however, the most controversial noncredit use of scoring is in insurance.

Insurers have discovered an enormously strong link between the quality of your credit and the likelihood you’ll file a claim. They can’t really explain it, but every large study of the issue has confirmed that this link exists. The worse your credit, the more likely you will cost an insurer money. The better your credit, the less likely you are to have an accident or otherwise suffer an insured loss.

As a result, most homeowners and auto insurers use credit scoring to decide who to cover and what premiums to charge them.

That outrages many consumers and consumer advocates who don’t see a logical connection between credit and insurance. Julie, a city worker in Poulsbo, Washington, saw her insurances soar after a divorce and subsequent bankruptcy trashed her credit:2

  • “I have had the same insurer for 30 years, never been late, never missed a payment, never had an accident, and never filed a claim—yet now I pay the price of higher rates. I absolutely do not understand how this is fair.”

This leads to another controversy, spelled out in the next section.

Credit Scoring’s Potential Unfairness

Developers of credit scoring point out their formulas are designed not to discriminate. Credit scores don’t factor in your income, race, religion, ethnic background, or anything else that’s not on your credit report.

But it’s not clear whether the result of those formulas actually is nondiscriminatory. Some consumer advocates worry that some disadvantaged groups might suffer disproportionately as a result of credit scoring.

Among their theories: People who have low incomes or who live in some minority neighborhoods might have less access to mainstream lenders and thus have worse credit scores. The lenders these disadvantaged populations do use—finance companies, subprime lenders, and community groups—might not report to credit bureaus, making it harder to build a credit history. If these lenders do report to the bureaus, their accounts might count for less in the credit-scoring formula than those of mainstream lenders. Seasonal work is also more prevalent in some neighborhoods, which can lead to a higher rate of late payments in the off-seasons.

Even if credit scoring doesn’t discriminate against groups, it might discriminate against you.

No credit-scoring system is perfect. Lenders know that their formulas will reject a certain number of people who actually would have paid their bills. Another group will be accepted as good risks but then default.

If these groups get too large, the lender has trouble. When too many bad applicants are accepted, the lender’s profits plunge. When too many good applicants are rejected, the lender’s competitors can scoop them up and make more money.

But lenders accept a certain number of misclassified applicants as a cost of doing business. That’s little comfort to you, if you’re one of the responsible ones who loses out on the mortgage you need to buy a home, or if you end up paying more for it.

Given all the problems with credit scoring, it’s understandable that some people think the system is fatally flawed. Some of my readers tell me they’re so angry about scoring and the behavior of lenders in general that they’ve cut up their credit cards and are determined to live a credit-free life.

The rest of us, though, live in a world where credit is all but a necessity. Few of us can pay cash for a home, and many need loans to buy cars. Credit can help launch or expand a business or pay for an education. And most Americans like the convenience of using credit cards. Although it’s true that improper use of credit can be disastrous, credit properly used can enhance your life.

If we want to have credit, we need to know how credit scoring works. Knowledge is power, and the tools I give you in this book will help you take control of your credit and your financial life.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020