What if I were to tell you that facilitating competition and innovation in the credit scoring industry would lead to better offers for financial products and services, while making it easier to manage your money as well as strengthening the overall economy? Considering the fact that we’re projected to incur at least $50 billion in new credit card debt during 2012 for the second consecutive year, most people would say let the facilitating begin. The only problem is that this would run counter to the business interests of the companies currently controlling the industry, and to them, our financial data is solely a means of making money and nothing more.
Don’t believe me? That’s fine, just go try to get your Experian FICO score. Don’t worry, I’ll wait.
You won’t be able to because Experian a few years ago pulled out of the MyFICO agreement that enables consumers to access the FICO score that is based on Experian credit reports, which thousands of the nation’s banks use. They did so to make the FICO score less useful and therefore boost their in-house credit score’s market position.
You see, Experian couldn’t just stop selling their FICO score to everyone because banks still depend on it and have too much clout, but our ability to effectively manage our finances was apparently acceptable collateral damage. In other words, Experian has access to the financial data that defines us in the eyes of lenders and other decision makers, but they won’t even let us use it. That just doesn’t seem right.
Experian’s relationship with FICO is by no means the only instance of credit bureaus playing games with consumer financial data either. It’s actually common for them to pick and choose which companies they want to share it with, according to how it suits their business development plans, and either refuse to sell the data to others or simply make it prohibitively expensive to purchase.
Ok, but why is it so important to be able to get your hands on one credit score as opposed to another?
First of all, each of your major credit reports contains different information, which means the credit scores based on them may differ as well. In addition, different lenders and financial decision makers use different credit scores to evaluate consumer financial responsibility. Being able to consult the exact score on which you’re being judged allows you to apply for the most appropriate products and services as well as better gauge both your likelihood of approval and the terms you can expect to get.
Now that it’s perhaps more obvious why reforms are necessary, let’s get into the types of changes we need and what they will do for the credit scoring industry, our wallets, and the overall economy.
In order to foster competition and innovation in the credit scoring agency, all that regulators really need to do is require that credit bureaus sell consumer financial data at a uniform price to any company that has permission to access it. Allowing businesses with fresh perspectives to take a crack at creating better credit scores as well as other derivative products and services not yet even conceptualized will transform the current stagnate market into a race to the top.
While you might think that better credit scores would only help banks, the truth is that all credit-responsible consumers would also benefit. The more accurately banks can predict losses, the better products and services they will be able to offer. Even taxpayers who don’t have the best credit standing will benefit given that fewer banks will default and need bailouts.
That’s only part of it, though, and here’s where things get particularly interesting. It’s obvious from the state of financial literacy that we could use some new products and services to both make personal finance easier on a day-to-day basis as well as help us understand it better – a bit of a crutch, if you will. I mean, 42% of consumers gave their knowledge of personal finance a grade of “C” or below, according to the National Foundation for Credit Counseling’s 2012 Financial Literacy Survey, and more than 70% of US parents say that their kids don’t even know the basics of money management, according to the 2012 Global Financial Literacy Barometer.
The truth is we’re not taking full advantage of the wealth of information in our credit reports, and this data could conceivably be used to create helpful new everyday banking apps, credit improvement services, financial literacy programs, models that accurately predict how certain decisions would affect one’s finances years down the road, etc. The possibilities are endless, and while it’s tough to say exactly what future credit data innovations would look like and do given that they’ve yet to be imagined, it’s certainly fair to assume that analyzing large amounts of credit data could unearth important and instructive trends that would provide useful insights into personal financial performance. Making the best possible financial decisions, despite our busy lives and the complexity of finance, would therefore be easier, and with society on the whole more effectively managing its money, the economic benefits would be undeniable.
There would be no repeating the rash of insanely risky borrowing that led to the housing market collapse. There would be no $50 billion in debt being added each year via credit cards alone. And you can forget about people leaving themselves without the financial safety net that is an emergency fund. In short, a widespread shift toward more sound financial decision making among consumers would help prevent overly risky habits that put the economy in jeopardy and stabilize the economy.
At the end of the day, the current state of the economy and the way we handle money on the personal level necessitates that we have more access to helpful financial information, not less. That’s why credit scoring industry reform must happen.