There is so, so much wrong with the credit scoring system in America, it's hard to know where to start. But the recent blunders by Equifax offer yet another reminder of the absurd power credit rating firms wield over Americans, my colleague Alexandra Peers writes.
ICYMI: Earlier this month, Equifax disclosed that it had sent out incorrect credit scores to banks and other lenders for potentially hundreds of thousands of customers. For nearly 300,000 people, that error resulted in a 25-point or higher shift in their credit scores — enough for some people to be denied a loan.
To be clear: Equifax has, like, one job. It's one of three big credit scoring firms that are supposed to accumulate consumer data that gets mysteriously boiled down to a number between 300 and 850 and then sold to financial institutions for a profit (more on that in a minute).
A higher score, of course, is a shorthand way of telling a bank that a person is reliable and likely to pay back whatever loan they're seeking. Lower scores = less reliable, which means lenders may deny you financing, or grant it with punishingly high interest rates.
Oh, and even though that data can have life-altering consequences, you do not own it, nor have much power to dispute it. The process is deliberately murky. And you cannot opt out of the system. I repeat, you cannot opt out.
The Equifax screw-up from this spring is just one that we know about, thanks to an investigation by the Wall Street Journal, which forced the company to acknowledge the mistakes.
If all of this sounds familiar it may be because Equifax also disclosed in 2017 that hackers had exploited a security flaw in its system to gain access to data for as many 145 million people -- roughly half the country. Oops...
Errors are so rife that in 2019 the Equifax CEO, Mark Begor, told the New York Times that when he first checked his own report, it showed he bought a vacuum cleaner he didn't own, a mobile phone service he hadn't signed up for and a credit card he didn't have.
BOTTOM LINE
Credit data is being used in broader ways that it was initially intended to be, sometimes quite sloppily, consumer advocates warn.
"Credit scores are increasingly being used as a measure of character, when sometimes it's just luck," said Chi Chi Wu, an attorney at the National Consumer Law Center.
The pandemic has further thrown the reliability of the data into question. People and businesses that struggled to pay their bills on time during lockdowns and layoffs that were far beyond their control may have seen their creditworthiness take a hit through no fault of their own.
How can a system so flawed be so powerful?
Again, no one can opt out, so their customer base is built isn. The for-profit companies have no motivation to provide any real service for consumers.
"One of the reasons that [errors] keep happening is that they can get away with it — they are an oligopoly, you can't pick between them, like you can with mobile carriers," says Wu.
All a consumer can do in the current system is dispute any errors, which relies on consumers knowing their rights and wading into the intimidating muck of their own reports. Oh, and be prepared to wait because there's a huge backlog in those complaints, the CFPB says.
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