Credit scores are these three-digit snapshots — usually a number between 300 and 850 — that represent a borrower’s risk of default.
They’re calculated by algorithms that use a borrower’s credit data, like the history of their credit payments, the amount of debt they owe, how long they’ve owned credit cards and more. Much of that data is collected and maintained by the three big credit bureaus, Equifax, Experian and TransUnion.
While the system scores millions of Americans, its critics say it doesn’t serve certain consumers, those who prioritize paying for things in cash, for example, or don’t have enough credit lines.
“They’re just not making enough payments, and enough lines of credit that are recognized by the credit scoring system,” said Frederick Wherry, professor of sociology at Princeton University and director of the Dignity and Debt Network.
Travis Richey, a Los Angeles-based actor, was surprised to learn that his credit was “awful” when he tried to buy a new car nearly a decade ago.
He’s in his 40s, but when he was younger, Richey took on thousands of dollars in credit card debt. He chose to close his accounts after paying that debt off, but that decision left him with a “thin” credit score.
“It was a surprise, because I thought having no debt was probably a good thing,” said Richey.
Credit bureau Experian says about 62 million Americans have a thin credit file. And it’s more likely a lender will reject someone with a thin credit file when they apply for that car loan or credit card.
“It’s much harder to predict whether or not you’re going to default if I have less information available about you,” said Laura Blattner, a professor of finance at Stanford University.
This can be a serious problem for the more than 19 million Americans who don’t have enough credit data to even generate a score, according to a 2015 study from the Consumer Financial Protection Bureau, a phenomenon more common among low-income, Black and Hispanic borrowers.
Past research has shown that borrowers of color have been targeted for unsustainable, higher-cost subprime mortgages, which means they might be more likely to default and suffer a negative hit on their credit.
In a recent working study, Laura Blattner and co-author Scott Nelson with the University of Chicago also found that credit scores for low-income and minority borrowers were inaccurate, using both mainstream scoring models and alternative scoring models designed to compensate for past inequities, suggesting that the choice of data is the potential problem.
But errors in a borrower’s credit profile can also cause problems for a potentially large group of consumers. In 2021, more than 5,000 volunteers participated in a survey by the non-profit advocacy group Consumer Reports, and 34% found at least one error on their credit reports.
Those errors can range from paid-off debt listed as unpaid to incorrect names on credit files. That’s a problem that Ethan Messere discovered a few years ago, when his application for a credit card was rejected.
“I always paid things on time, I didn’t have a bunch of high-interest debt … getting turned down on a simple credit card was a surprise,” said Messere.
Ethan is transgender and changed his former legal name back in 2013. About one year later, he discovered that one of the three major credit bureaus still used his former name on his file. That meant his credit history, for a short time, effectively didn’t exist on that one file.
That hurt his finances at a time when he was paying off a mortgage.
“It was a lot of penny pinching, staying up at night wondering if I had to get a second job, even though I knew that, theoretically, it shouldn’t be so hard,” said Messere.
Messere was eventually able to dispute and correct those errors. But when it comes to people like Travis Richey, who choose not to have any debt or don’t have the right kind of debt, does that mean they’re not creditworthy?
Princeton’s Frederick Wherry believes it’s more complicated than that.
“You’re not going to realize that they have different ways of prioritizing how they engage in a credit system,” said Wherry.
An algorithm doesn’t factor in all those nuances.
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The CFPB has some insight and tips into how people with thin or even non-existent credit profiles can build up their credit, like applying for a small loan at a credit union and regularly checking your credit report.
You can check your credit report at each of the three major bureaus for free once a week until the end of 2022, according to the FTC. This is an extension of a program launched shortly after the COVID pandemic began in 2020.
Both the FTC and the three big credit bureaus – Equifax, Experian and Transunion – recommend visiting AnnualCreditReport.com to get those free, weekly reports.
We also reached out to the Consumer Data Industry Association, a trade group that represents those three major bureaus. You can read their response on credit report errors and best ways to dispute them below.
“The credit reporting industry is committed to helping consumers resolve potential errors on their credit reports and we are working diligently across the financial ecosystem to help ensure that data on consumer credit reports is accurate and comprehensive. We recommend consumers proactively monitor their credit reports so that they are more aware of what lenders may see, and so that they can alert the credit bureaus of any potential errors. Our industry has taken joint action to extend the pandemic response service offering free weekly credit reports to consumers through the end of 2022. These free weekly credit reports are available from AnnualCreditReport.com, the only official website authorized by federal law for this purpose. If a consumer reviews their credit report and finds their personal information to be inaccurate or incomplete, they may file a dispute online with Equifax , Experian and TransUnion.”Consumer Data Industry Association