Digital Thoughts – Extra Credit Part 2

The idea behind credit and a credit score is a good one. It means a reduced reliance on cash and a way for consumers to leverage their past behavior. For lenders it means having a tool to help gauge an applicant’s loan worthiness. The credit score absolutely gives individuals quicker, easier access to funds, and it offers lenders a means to objectively assess how much to give and the likelihood of not receiving payment back. When someone wants to know your credit, what they really want to know is your risk. Think of it as that letter grade pasted outside of all eateries in California. If you’re the equivalent of a “C” restaurant, people looking for the cleanest environment will hesitate before dining at your business.

Current day credit scores, based off the information in the credit report, are often called FICO scores, because the three major bureaus, Equifax, Experian, and TransUnion use software developed by the Fair Isaac Corporation (FICO). Several factors, weighted differently, go into the calculation of the FICO Score. These include how punctual you have been in making payments (accounting for 35%), capacity used, i.e., how much have you currently spent / borrowed compared to what you actually could spend (30%), length of credit history (15%), types of credit used, i.e. credit cards, loans, etc. (10%), and amount of credit obtained in the recent past (10%). Almost counter intuitively, current income and employment history do not influence the FICO score. Bankruptcies, court judgments, and tax liens, especially when recently do impact the score and negatively. The same is said to be true with the number of credit card style accounts – having too many also weighs negatively on the score. Additionally, frequent requests from potential lenders also hurts your credit score.

As mentioned in Part One of this article, I went through the process of checking my credit report using my once per year freebie. The annual credit report site asks some basic, very personal, data points. When they hand you off to the credit reporting sites, e.g. Experian.com, each of these will further qualify you prior to displaying the results. Experian for example asked me information about my car loan. I actually failed their additional qualification as I used what I actually pay each month instead of what the minimum required payments are. Unfortunately for me, they provide no chance to correct it. Luckily, I had two more chances as the free credit report offers a person a chance to see data from all three agencies. And, rather than try to space out my viewings from the other two, i.e. keep my free report for some time later, if that’s possible, I pressed right ahead.

The report, which is more of a raw data dump than a true report, lists a) what accounts you have – both credit card accounts and loans, b) duration of each, c) balances – including high balance on credit cards, d) payment history, e) the status of the accounts, i.e. which are open and which are closed, f) who makes regular inquiries, i.e. has your full credit report – in my case my cell phone company and apartment complex, g) who has made promotional inquiries, i.e., knows you match certain criteria so they can send you direct mail – in my case mainly credit cards and insurance companies, h) who has made account review inquiries – these requests do not impact the score but do impact insurance, as well as i) whether you have any court ordered payments or judgments against you from the government.

Two things are pretty clear – that the score card information from the credit bureaus will no doubt confuse the average person and that I most likely missed a few things in my list above. Additionally, in my exploration, I noticed subtle differences between the data found on the two reports I could access along with different naming conventions. All sites make it possible to challenge information contained on the report, but none make it truly clear what impacts the credit score and how it does so. In other words, these companies are not our friends. While ostensibly consumer focused, they don’t feel consumer oriented.

One thing people tend not to know is who can look at their credit report. The answer is a lot of people, or as the credit companies put it, anyone with “a permissible purpose” can. This includes potential lenders, landlords, insurance companies, employers and potential employers (usually only with your written consent), companies you allow to monitor your account for signs of identity theft, any government agency (although they may be allowed to view only certain portions), the slightly ambiguously titled “someone who uses your credit report to provide a product or service you have requested,” and someone that has your written authorization to obtain your credit report. In other words, your data is in a lot of places, all of which underlies the growing susceptibility for fraud and theft. Two federal acts exist to help consumers with respect to the protection, accuracy, and correction of their credit, the Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACT) which actually amends the FCRA. While good, they are baby steps.

All of which brings us back to mortgage lead gen. Hard to believe, but the flood of mortgage offers ties into some higher purpose, credit. Companies like LowerMyBills.com, whether they knew it or not prior to the acquisition, love credit. The low interest rates tempt people to draw upon their credit for investment as opposed to using only existing cash and putting it into non-credit driven securities. While not a primary objective of this piece, by better understanding credit, we can also understand how it drives our space. Credit explains the mortgage boom, why certain ads do well, and what areas companies like Experian have not just an interest, but an advantage. Yet this is only the tip of the iceberg. Chances are that we’ll see a credit revolution in our lifetime. The fact is that too many people have access to our information and the keepers of that information do not have our interests at heart. This alignment chasm, fueled by the power of credit in general, has helped create the identity theft crisis. That the companies who track us want to sell us access to our own behavior only increases the depth and size of the chasm. While often a tool for those looking to commit fraud, the Internet will ultimately provide the means to align consumers and put the power where it belongs, with us. Social networking and user ratings are not just business fads or tools of sites like eBay. They are a realization of human behavior and the foundation for a safer future. We need credit and a credit score. We just don’t need the way both are being managed now.