If you are old enough, you can remember when bankers granted loans based on a paper file and a face to face interview. If you got the loan, chances are you looked a lot like the banker. Same race, same gender. That was the downside of the good old days.
Enter the FICO score which does not take into account gender, race, ethnicity, age, creed or disability. FICO predicts future financial behavior based on past performance. Obviously this is a more objective evaluation of credit worthiness not to mention more equitable. So for what it is, a predictor of credit worthiness, it is a great tool for those lending credit ( free credit report and score ).
But does it predict what kind of driver you are? Can it guarantee what kind of worker you are? What part of the score predicts how healthy you will be or how long you will live?
Apparently the answer to those questions is secret because the companies and organizations that use your FICO scores and credit reports to underwrite their business are not sharing their evaluation process for “competitive” reasons. Where did they get the idea to use this information in the first place?
Let’s take a little look back in time. Remember when there were more than just three credit reporting agencies? Actually they liked to be called bureaus back then. Ever notice how they like to sound like an arm of the government? When the government stopped naming entities bureaus and changed to agencies, so did the credit reporting people. Well they are not part of the government; they are for profit organizations that sell data you provide.
With the quantum leap in information technology, the cost of gathering and processing your data dropped dramatically and the credit bureau business consolidated into the big three. Competition became pretty fierce and the cost of a credit report dropped. Facing reduced margins, credit agencies looked for a way to repurpose the information they gathered on individuals.
According to the Center For Economic Justice, a consumer advocate group, the credit agencies started pitching the idea that credit reports and FICO scores could predict more than credit worthiness, it could predict how a person would behave. It was pitched as a cheap background tool, an inexpensive underwriting device and as an identity verification tool. The agencies literally created the market.
But is using a credit report or free credit score a realistic way to predict behavior? Typically, the lower your score, the more it costs you for goods or services and the greater it detracts from applications ranging from employment to insurance.
Two groups of insurance agents, United Farmers Agents and the Association of Professional Allstate Agents think credit scores have nothing to do with underwriting insurance. Understandably, the agents lose commissions when the insurance is priced higher than some can afford. Their argument is a person with identical driving record, car and claims history of that of another person should not pay a higher premium than simply based on a lower FICO score. “No wonder there are so many uninsured drivers” says one Allstate agent.
The same arguments can be made for health and life insurance as well. In essence, those who can afford it least end up paying the most.
So what can you do to prevent being charged for a low score? The credit agencies have the answer. They will sell you monitoring services so you can keep track of your record and dispute any errors you may find. That’s right; you pay them so you can correct your data. Data, that was incorrectly entered by them in the first place.
Is it time for reform? Credit reports and scores have a legitimate purpose when it comes to lending, but without empirical proof, should it be allowed to be used as an underwriting tool.
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