This story is part of The Privacy Divide, a series that explores the fault lines, disparities, and paradoxes that have developed around data privacy and its broader impacts on society. Read the series here.
Take a look at a credit report from one of the big three credit reporting agencies, and you’re likely to see certain types of accounts listed: credit cards, mortgages, car payments, and student loans, for instance.
How you pay those bills impacts the credit score that lenders use to determine how risky you are. But other types of accounts don’t generally show up on your traditional credit report. Those include phone and electric bills, rent, and payments to many types of credit providers such as payday lenders, rent-to-own stores, and online personal lenders.
The country’s biggest credit bureaus—Experian, Equifax, and TransUnion—are trying to change that. As part of a growing push to expand the population to whom lenders can offer loans, the companies are helping lead an industry push to gather “alternative” credit data, in what’s been called one of the biggest changes to credit scoring in years.
The credit agencies, which already collect mountains of personal data on consumers, say the newer, specialized types of credit reports are meant to expand the credit files of millions of Americans, and potentially help raise the credit scores of lower-income people and others who are typically locked out of traditional credit. The new data could also help those without credit cards or mortgage loans, like younger consumers, immigrants, and others who have what the industry calls “thin” credit files with relatively little data.
“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” said Richard Cordray, then-head of the Consumer Financial Protection Bureau (CFPB), in 2017, as the agency began an inquiry into the practice. Since then, each of the major three credit bureaus has acquired a company specializing in alternative data.
But in the wake of the 2017 Equifax breach and amid ongoing efforts to reform the industry, consumer advocates say alternative data raises more than just privacy concerns. Collecting increasing amounts of alternative credit data–especially data about short-term loans and utility payments–could lead to more adverse outcomes for some, especially in disadvantaged communities, says Christopher Peterson, a professor at the University of Utah’s College of Law and director of financial services at the Consumer Federation of America.
“With respect to discrimination and potential issues there, I have real concerns that alternative data sources may just end up creating new ways to replicate the same legacy of discrimination that’s already baked into a lot of the socioeconomic structures in our society,” he says.
Where the data comes from, and how
One of the leading arguments for including more data is that already vulnerable populations typically face high hurdles to gain access to affordable mainstream credit. A 2017 report by the CFPB found that consumers living in low income areas are 240% more likely than those in richer areas to become “credit visible”–to accumulate a first credit bureau file–not through positive data like timely credit card payments, but through negative information like overdue bills.
Black and Hispanic people are also disproportionately affected by thin or nonexistent credit bureau files, the agency has said. In all, the CFPB estimated in 2017 that about 26 million Americans had no credit history, and another 19 million had too little data to produce a credit score.
“Part of this push for alternative data is recognition that people are being locked out of opportunities that having a good credit score is associated with,” says Tamara Nopper, an assistant professor of sociology at Rhode Island College, who has written about credit issues.
Research into alternative data shows that it can bring benefits to individuals’ credit scores. A study released by the New York City comptroller’s office in 2017 using Experian data found that about 28.7% of a sample population studied gained a credit score for the first time using data about their rental histories, with the average new score at 700 points, according to the report. Over two-thirds of city renters would see their credit scores go up with their rental histories included, the analysis found, while just 6% would see a decline. Another 18% would see essentially no change.
But not all credit is created equal, says Peterson, who predicts that while some kinds of alternative data could help certain consumers get access to good credit, others might be newly tagged as too risky for mainstream credit. (For their part, the credit bureaus generally emphasize that banks and other lenders each have their own criteria for credit decisions.)
“The assumption behind a lot of rhetoric that I see here is that having a credit record and having access to credit is a good thing, and that just depends on whether the credit is good credit,” he says. “The problem is that across the country, we have thousands of lenders that deliberately market their loans to people that cannot afford to repay them in a reasonable amount of time and a reasonable interest rate.”
The short-term lending industry, which now loans Americans nearly $90 billion every year, has expanded beyond the traditional, pricey in-store “payday” loan and is growing online, with new companies offering loans on a variety of terms. Many of these digital lenders are increasingly relying on alternative data collected from credit bureaus or directly from consumers, including information about existing short-term loans that historically weren’t tracked by the big credit bureaus.
“Typically as a traditional credit reporting agency, lenders that offers loans shorter than three months generally don’t report that information to TransUnion,” says Jason Laky, TransUnion’s consumer lending business leader. To improve its data collection, in 2017, the company acquired FactorTrust, a company known for gathering data about short-term loans. “FactorTrust is one of the specialized credit reporting agencies that emerged to collect that kind of information,” he says.
The other big credit agencies have also sought out more data about consumers. In 2017, Experian also acquired an alternative credit bureau called Clarity Services, which offers data from small-value lenders, as well as telecom companies, auto finance providers, and other accounts typically not represented in traditional credit reports.
In a blog post, the company said that alternative data is capable of “giving lenders more confidence in their decision and allowing consumers to gain access to lower-cost financing.” The data can “also help identify riskier consumers by identifying information like the number of payday loans acquired within a year, number of first-payment defaults, number of inquiries within the past 30-90 days, and overall stability of an applicant.”
Last year, Equifax acquired an alternative data provider called DataX. “With DataX, we’re getting better insight, particularly in the alternative finance and the short-term lending space,” Scott Collins, SVP and GM of banking and lending at Equifax, tells Fast Company. “We also can see really in real time the payment history from those consumers on those loans.”
Creditors are motivated to report consumers’ information to the bureaus by the knowledge that doing so can make consumers more likely to keep up with bills. “One reason lenders report to the credit bureaus is it’s a means of ensuring your customers pay,” says Chi Chi Wu, a staff attorney at the National Consumer Law Center.
In some cases, they’re also motivated by additional financial incentives. Experian, for instance, collects rental payment data from rental bill pay providers and big landlords, offering discounts when they research potential tenants.
In some cases, credit agencies are also asking consumers to volunteer their alternative data.
Self-reporting of “healthy” financial activity, like bill payments and bank transactions, is the approach behind UltraFICO, a new scoring approach announced late last year by Fair Isaac, the company commonly called FICO, and behind the credit score of the same name, along with Experian and fintech company Finicity. UltraFICO, which is still in a limited pilot phase, lets consumers voluntarily submit their bank account data when applying for credit in order to get approval from lenders on the fence or access better terms.
That could help consumers with thin credit histories, including young people and recent immigrants, and those who’ve stopped using credit because of issues in the past, says FICO Scores vice president Sally Taylor.
“They’ll get a screen that will allow them to enter their credentials, just like they’re going into their online banking product,” she says. “We don’t look at where people shop or anything like that.”
Experian’s new Boost service, launched last month, imports another set of information–data from your bank accounts showing what you paid toward your utility and telecom bills–raising scores in most cases, the company says.
FICO also offers another alternative score, called FICO Score XD, developed with LexisNexis Risk Solutions and Equifax. It uses traditional credit bureau data if it is available, combined with information from the National Consumer Telecom and Utilities Exchange, an Equifax-managed data collection on utility, cell phone, and cable payments. FICO XD also takes into account information from LexisNexis on property ownership, moves, evictions, bankruptcies, and liens to produce a score in the 300 to 850 range familiar to lenders.
Companies issuing credit are able to pull XD scores in cases where consumers don’t have enough credit file data to compute a traditional FICO score.
“With FICO XD, the idea is that you’re able to use it to open up a credit report,” says Wu. “Once you have a credit card and start paying onto it, that’s your on-ramp into conventional credit reporting.”
How risky–and alternative–alternative data gets
Still, some consumer advocates have expressed concern that so-called alternative data reports could lead to consumers being evaluated as higher risks than they would be with no reports at all.
“The lack of a credit file may be better than a credit file that incorporates some of this information, particularly if you get some of this information and it makes you more negative,” says Ed Mierzwinski, senior director of the federal consumer program at the U.S. Public Interest Research Group.
Consumer advocates have warned that this could result in a Catch-22 for certain borrowers: Rather than helping consumers escape bad credit, relying on short-term loan data to evaluate consumers’ credit worthiness could effectively keep those consumers locked in to receiving credit only from high-interest lenders.
“Using alternative data may result in giving subprime scores to formerly invisible consumers, boxing them into high-priced credit and making them targets for predatory lenders,” the consumer groups warned in their letter to the CFPB.
Some alternative data has landed in court: Federal lawsuits brought against Experian and its Clarity unit in Florida, as well as TransUnion in Illinois, alleged the bureaus reported delinquent accounts at online short-term lenders, even though the loans were reportedly illegal in the states where borrowers lived.
So far, both courts have rejected arguments that the credit bureaus should validate that the debt is legal before allowing it to appear on credit reports. Plaintiffs have appealed the ruling in the Florida case and plan to appeal the Illinois ruling, according to attorney Michael Caddell, who represents the plaintiffs in both cases.
“What I can share is simply that these lenders are not licensed in the states where they’re operating, and as a result, their loans are illegal and should not be reported,” says Caddell, of law firm Caddell & Chapman. “It’s like loan sharking or the Mafia.”
Representatives for Experian and TransUnion declined to comment.
While laws like the Equal Opportunity Credit Act say creditors legally can’t make decisions based on protected categories like race or gender, there’s also a risk that alternative data points could exacerbate existing disparities in income and financial stability.
A report released last year by the Government Accountability Office on the use of alternative data by newer online lenders suggested regulators offer more guidance on how alternative data can be used while staying within non-discrimination rules. The report also cited concerns about privacy, with lenders having access to greater sets of consumer data than in the past.
“We have previously reported that some fintech firms may pose privacy concerns because they may collect more consumer data than traditional firms,” according to the report. “For example, fintech lenders that use alternative data in underwriting may have sensitive information such as consumers’ educational background or utility payment information, and according to certain stakeholders, these data may contain errors that cannot be disputed by consumers under the Fair Credit Reporting Act.”
Impacts on “what bills get paid when”
Another potential downside is that financial stumbles or decisions that would previously go unreported–say, a late electric bill payment during the peak winter heating season or a rent payment withheld in a dispute with a landlord–can come to haunt consumers. Currently, such accounts often only show up on credit reports if a consumer falls severely behind or is sued by a utility or landlord.
Should reporting of late versus on-time payments to companies like utilities become more routine, it could shift how consumers with limited funds prioritize their bills and other spending, says Nopper, the sociology professor. “A lot of people make very calculated decisions about what bills get paid when,” she says.
“State laws often include consumer protections intended to protect vulnerable populations from the loss of electric and natural gas utility service during high-cost months, and in times of illness or financial hardship,” warned the National Consumer Law Center and other consumer groups in a 2017 comment to the CFPB. “These consumers may sometimes defer full payment of utility bills until later in the year, knowing they are protected from shut-off. Adopting full file utility credit reporting would undermine these health and safety protections.”
Consumers may prioritize more payments by factoring in what companies will charge late fees, disconnect service, or assess other penalties. Enhanced effects on future credit decisions might well impact those calculations, says FICO’s Taylor.
“As consumers realize this information can potentially be used to help them, that will change their behaviors,” she says.
— with Alex Pasternack
See your file
The big bureaus generally haven’t merged the new data sources into their traditional reports, keeping them as separate offerings. If consumers want to see their their alternative data reports and scores, they also must generally request those separately from their standard reports.
You can request your files, opt out of prescreened credit offers, or request a credit freeze from each of the big three bureaus’ alternative data units. To do so, visit the following sites: