The credit scoring system is broken, plain and simple.
Credit data is supposed to be ours, the consumer's. It's supposed to accurately reflect our fiscal responsibility, allowing lenders to determine eligibility for credit, while enabling us as consumers to make better financial decisions. That's not how the credit bureaus (and regulators, apparently) see things, though.
Experian, Equifax, and TransUnion – the three largest credit bureaus – routinely play games with our credit data, leveraging their access to it in order to advance business agendas rather than serve the very people on whom this information is based.
Perhaps the best example of this is the case of Fair Isaac and Experian. As we all know, Experian sells the FICO score to banks but claims to be unable to come to terms with FICO to provide consumer access to it.
Who's to blame here? Well, FICO obviously wants to sell its Experian-based score, so it seems clear that Experian is holding things up in order to increase the relevance of its alternative, VantageScore.
This puts consumers who want to get a loan or a credit card from a bank that uses the Experian-based FICO score in the dark as to the terms they can expect to get. Though this credit score is based on their financial information, they can't get their hands on it, even for a cost.
You know what? Maybe Occupy Wall Street had it right.
No, I'm not talking world revolution or anything like that. Rather, I'm referring to the letter the OWS Alternative Banking subgroup recently sent to Richard Cordray, the director of the Consumer Financial Protection Bureau. This correspondence outlined the issues OWS has with the way credit reporting and scoring is handled in this country, and while it laid out some off-base suggestions for how to fix the problems, the group's recognition that the system is flawed and their call for the elimination of credit bureau conflicts of interest are spot on.
What we need is a system in which credit bureaus are required to sell consumer data at a uniform price to any company with permission to access it, instead of pricing out perceived competitive threats or withholding the information altogether. No longer is credit scoring a niche industry that affects a relatively small segment of the population. Its ubiquity and importance has transformed credit data into a utility, and it must be regulated as such.
What would this accomplish?
It would foster competition and innovation within the scoring industry. This would in turn lead to more accurate credit scores as well as increased foresight and better financial products and services for consumers, including some that have yet to even be conceived.
As more companies are able to take a crack at creating credit scores, better and better scores are bound to come. With the ability to better predict consumer risk, unexpected defaults will be less of a concern for banks, which will therefore be able to pass along resulting savings to consumers in the form of more competitive rates and fees. That's obvious.
What is perhaps less clear is the effect that innovative new products and services could have on the shockingly poor financial literacy being displayed by our nation's consumers. The more people who make sound financial decisions, the better it is for the overall economy.
When you get down to it, the credit scoring system needs fixing, plain and simple, and that is how I propose we fix it.
Odysseas Papadimitriou is the founder and chief executive of Evolution Finance, the parent company for CardHub, a website that helps people shop for credit cards, and WalletHub, a personal finance social network. Papadimitriou previously worked at Capital One for nearly eight years.