The data problem with credit score algorithms

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Credit scores are those three-digit snapshots — usually a number between 300 and 850 — that represent a borrower’s risk of default.

They’re calculated by algorithms that use a borrower’s credit data, like their credit payment history, how much debt they owe, how long they’ve had credit cards and more. . Much of this data is collected and stored by the big three credit bureaus, Equifax, Experian and TransUnion.

While the system has millions of Americans, its critics say it doesn’t serve some consumers, those who prefer cash, for example, or who don’t have enough lines of credit.

“They just don’t make enough payments and enough lines of credit recognized by the credit scoring system,” said Frederick Wherry, a sociology professor at Princeton University and director of the Dignity and Debt Network.

Los Angeles-based actor Travis Richey was surprised to learn his credit was “awful” when he tried to buy a new car nearly a decade ago.

He’s in his 40s, but when he was younger, Richey ran into credit card debt worth thousands of dollars. He chose to close his accounts after repaying that debt, but the decision left him with a “thin” credit rating.

It was a surprise, because I thought having no debt was probably a good thing,” Richey said.

Experian credit bureau says about 62 million Americans have a thin credit record. And a lender is more likely to reject someone with a thin credit history when applying for that car loan or credit card.

“It’s much harder to predict whether you’re going to default or not if I have less information available about you,” said Laura Blattner, a finance professor at Stanford University.

According to a 2015 study from the Consumer Financial Protection Bureau, a phenomenon more common among low-income, black and Hispanic borrowers.

Past to research showed that borrowers of color were targeted for unviable, higher-cost subprime mortgages, meaning they could be more likely to default and suffer a negative impact on their credit.

In a recent work studyLaura Blattner and co-author Scott Nelson of the University of Chicago also found that low-income and minority borrowers’ credit scores were inaccurate, using both traditional and alternative scoring models. designed to compensate for past inequalities, suggesting that the choice of data is the potential problem.

But errors in a borrower’s credit profile can also cause problems for a potentially large group of consumers. In 2021, more than 5,000 volunteers took part in an investigation by the non-profit advocacy group Consumer Reports, and 34% found at least one error in their credit reports.

These errors can range from repaid debt listed as unpaid to incorrect names on credit files. It’s a problem Ethan Messere discovered a few years ago when his credit card application was rejected.

“I always paid for things on time, I didn’t have a lot of high interest debt…being denied a simple credit card was a surprise,” Messere said.

Ethan is transgender and has changed his old legal name in 2013. About a year later, he discovered that one of the three major credit bureaus was still using his old name on file. This meant that his credit history, for a short time, effectively did not exist on this file.

This hurt his finances at a time when he was paying off a mortgage.

“It was a lot of pinching money, lying awake at night wondering if I should get a second job, even though I knew that theoretically it shouldn’t be that hard,” Messere said.

Messere was eventually able to challenge and correct these errors. But when it comes to people like Travis Richey, who choose not to have debt or who don’t have the right kind of debt, does that mean they’re not creditworthy?

Princeton’s Frederick Wherry thinks it’s more complicated than that.

“You’re not going to realize that they have different ways of prioritizing how they engage in a credit system,” Wherry said.

An algorithm does not take into account all these nuances.

The CFPB has some overview and tips on how thin people or even non-existent credit profiles can build up their credit, like applying for a small loan from a credit union and checking your credit report regularly.

You can check your credit report at each of the three main bureaus for free once a week until the end of 2022, according to the FTC. This is an extension of a program launched shortly after the start of the COVID pandemic in 2020.

The FTC and the big three credit bureaus – Equifax, Experian and Transunion – recommend visiting AnnualCreditReport.com to get these free weekly reports.

We also reached out to the Consumer Data Industry Association, a trade group that represents these three major bureaus. You can read their response on credit report errors and the best ways to dispute them below.

“The credit reporting industry is committed to helping consumers resolve potential errors in their credit reports and we are working diligently across the financial ecosystem to ensure that credit reporting data creditworthiness of consumers are accurate and complete. We recommend that consumers proactively monitor their credit reports so they are more aware of what lenders may see and so they can alert the credit bureaus of any potential errors. Our industry has taken joint action to expand the pandemic response service offering free weekly credit reports to consumers through the end of 2022. These free weekly credit reports are available at AnnualCreditReport.com, the only official website authorized by federal law for this purpose. If a consumer reviews their credit file and finds that their personal information is inaccurate or incomplete, they can file an online dispute with Equifax , Experian and Trans Union.”

Consumer Data Industry Association

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