It is well understood and taken for granted that everyone is assigned a FICO credit score and that this score can be used to make lending decisions. However, increasingly the FICO score is being used by industries outside the economic domain and this justifies investigating a bit further.
Your FICO score turns you into a number. More specifically, your FICO score is created by a calculator whose "input" is the information on your three major credit bureaus: TransUnion, Experian, and Equifax. Each American therefore has 3 credit scores, one for each credit bureau´s data.
These 3 "credit scores" affect consumers well beyond lending decisions. FICO scores can determine whether or not you get a job, can partially determine how much you spend for various types of insurance, and can even be used to decide whether you can rent a property by a landlord. The FICO score is therefore increasingly used the same as one´s criminal or educational record. It is clear that FICO score is a discriminating factor which directly affects more and more of consumer´s lives.
In theory the FICO score measures one´s reliability, or financial trustworthiness, a worthy trait to try to measure. If we examine a few key aspects of the FICO measure it is not clear that that is what is being calculated. For example, the FICO score rewards people who have a variety of lines of credit. Per FICO scoring, the ideal consumer has a mortgage, several credit cards, a few department store credit cards, and an auto loan, all being paid on time. If a consumer fails to open enough lines of credit his/her score will therefore not be as high as one who does. Moreover, if a consumer cancels a credit card he no longer needs or pays a loan off early (wise financial decisions), a substantial drop in credit score can be expected! One might easily argue that the FICO score measures not trustworthiness of any sort but rather "profitability"- measuring how much profit a perspective lender can expect to make off of the consumer. Consumers with the best FICO scores, with many and diverse active credit lines for decades, are typically those who have made creditors the most profits. One could argue that deciding non-lending matters using FICO scores as a factor is as indiscriminate as using gender or race, factors outlawed by law.
There are laws, such as the Fair Credit Reporting Act (FDCPA), which regulate the way in which data can be stored on one´s credit file. For example the FDCPA say that most types of credit can only appear on credit reports 7 years from the date of last activity. The FDCPA also gives consumers rights to dispute items on their credit reports which may be inaccurate and mandates that these items must be investigated and removed if found to be incorrect. We can say that the information put into the FICO calculator is regulated. But what about the score which comes out of this calculator?
The scoring system is not directly regulated. Instead, it is privately owned and created and purposefully kept secret. Lawmakers have not addressed the issue as it has traditionally been seen as lenders deciding how to best make their private lending decisions. But if the score is allowed to encroach into non-lending decision making more oversight should be required. One closing one´s credit cards down arguably should not affect whether one gets a job.
The solutions here are straightforward. One option would be to deem use of FICO score as a non-lending decision factor as a form of illegal discrimination. A second option would be to regulate the scoring system and letting consumers and government co-create the system so that it measures more accurately the decisions it influences.
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Your FICO score turns you into a number. More specifically, your FICO score is created by a calculator whose "input" is the information on your three major credit bureaus: TransUnion, Experian, and Equifax. Each American therefore has 3 credit scores, one for each credit bureau´s data.
These 3 "credit scores" affect consumers well beyond lending decisions. FICO scores can determine whether or not you get a job, can partially determine how much you spend for various types of insurance, and can even be used to decide whether you can rent a property by a landlord. The FICO score is therefore increasingly used the same as one´s criminal or educational record. It is clear that FICO score is a discriminating factor which directly affects more and more of consumer´s lives.
In theory the FICO score measures one´s reliability, or financial trustworthiness, a worthy trait to try to measure. If we examine a few key aspects of the FICO measure it is not clear that that is what is being calculated. For example, the FICO score rewards people who have a variety of lines of credit. Per FICO scoring, the ideal consumer has a mortgage, several credit cards, a few department store credit cards, and an auto loan, all being paid on time. If a consumer fails to open enough lines of credit his/her score will therefore not be as high as one who does. Moreover, if a consumer cancels a credit card he no longer needs or pays a loan off early (wise financial decisions), a substantial drop in credit score can be expected! One might easily argue that the FICO score measures not trustworthiness of any sort but rather "profitability"- measuring how much profit a perspective lender can expect to make off of the consumer. Consumers with the best FICO scores, with many and diverse active credit lines for decades, are typically those who have made creditors the most profits. One could argue that deciding non-lending matters using FICO scores as a factor is as indiscriminate as using gender or race, factors outlawed by law.
There are laws, such as the Fair Credit Reporting Act (FDCPA), which regulate the way in which data can be stored on one´s credit file. For example the FDCPA say that most types of credit can only appear on credit reports 7 years from the date of last activity. The FDCPA also gives consumers rights to dispute items on their credit reports which may be inaccurate and mandates that these items must be investigated and removed if found to be incorrect. We can say that the information put into the FICO calculator is regulated. But what about the score which comes out of this calculator?
The scoring system is not directly regulated. Instead, it is privately owned and created and purposefully kept secret. Lawmakers have not addressed the issue as it has traditionally been seen as lenders deciding how to best make their private lending decisions. But if the score is allowed to encroach into non-lending decision making more oversight should be required. One closing one´s credit cards down arguably should not affect whether one gets a job.
The solutions here are straightforward. One option would be to deem use of FICO score as a non-lending decision factor as a form of illegal discrimination. A second option would be to regulate the scoring system and letting consumers and government co-create the system so that it measures more accurately the decisions it influences.
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