Credit scoring systems in the United States have garnered considerable criticism from various media outlets, consumer law organizations, government officials, debtors unions, and academics. Racial bias, discrimination against prospective employees,"Millions Need Not Apply". The New York Times, May 29, 2011. discrimination against medical and student debt holders, poor risk predictability, manipulation of credit scoring algorithms, inaccurate reports, and overall immorality are some of the concerns raised regarding the system. Danielle Citron and Frank Pasquale list three major flaws in the current credit-scoring system: Disparate impacts: The algorithms systematize biases that have been measured externally and are known to impact disadvantaged groups such as racial minorities and women. Because the algorithms are proprietary, they cannot be tested for built-in human bias. Arbitrary: Research shows that there is substantial variation in scoring based on audits. Responsible financial behavior can be penalized. Opacity: Credit score technology is not transparent so consumers are unable to know why their credit scores are affected.
The scoring system has also been critiqued as a form of classification to shape an individual's life-chances—a form of economic inequality. Since the 1980s, neoliberal economic policy has created a correlation between the expansion of credit and a decline in social welfare—deregulation incentivizes financing for the consumption of goods and services that the welfare state would alternatively provide. Credit scoring systems are seen as scheme to segregate individuals creditworthiness necessitated by the loss of these collective social services. The credit scoring system in the United States has been compared to, and was the inspiration for, the Social Credit System in China.
The use of credit information in connection with applying for various types of insurance or in landlord background checks (for rental applications) has drawn similar amounts of scrutiny and criticism, because obtaining and maintaining employment, housing, transport, and insurance are among the basic functions of meaningful participation in modern society.
Discriminatory effects Credit scores are widely used as the basis for decisions to allow or deny individuals the opportunity to do things such as taking out loans, buy houses and cars, and open credit cards and other kinds of accounts. This has been criticized as a practice having discriminatory effects.[Rice, L and Swesnik, D: "Discriminatory Effects of Credit Scoring on Communities of Color" Suffolk University Law Review 46:935 (2013)] Credit companies purport to measure creditworthiness by looking at information like: the number of accounts held, the age of associated credit accounts, consumer payment history of borrowed money, and the punctuality and consistency of payments.
As credit scores have become necessary to maintain credit and purchasing power, this system has been criticized as a wall between favored and disfavored classes of people. The expansion of accessible credit can come with a downside of exclusion as people with poor credit (those that are considered high risk by credit scoring systems) become dependent on short-term alternatives such as licensed money lenders (the home credit industry), pawn brokers, payday lenders, and even loan sharks. Credit scores can function as a form of social hierarchy that creates opportunities to exploit poor Americans. This can also prevent people from ever escaping their poverty or a poor financial past.
Credit scoring systems also act as a way to treat individuals as objects that are subject to a particular set of quantifiable attributes. In addition, they have a degrading potential that celebrates calculability over human needs. Discriminatory responses to poor credit create a self-fulfilling prophecy as it raises costs for future financing which increases the likelihood of being unemployed or insolvent. Since credit scores aim to classify people, other markets have expanded its applicability for use as a screening or assessment tool. Credit is no longer used just for financial products such as mortgage loans, but is increasingly being applied cross-institutionally for other services such as: car insurance health insurance starting utilities (electricity, natural gas, water, etc.) employment rental housing small purchase financing (e.g. cell phones, appliances, etc.)
Alternative credit scoring systems can use data such as rental payments, utility payments, subprime credit, and cell phone bills. Other sources are social media activities, internet browsing history, employment history, student history, past loan application dates and locations, or the method one uses when purchasing gasoline. Scores have also used for bespoke purposes such as dating. Prior to the formation of the Fair, Isaac and Company (FICO) or the Fair Credit Reporting Act of 1970), early credit scoring systems such as the Retail Credit Company (now Equifax) in Atlanta, Georgia gathered information on individuals' sexual lives, disabilities, their political ideologies, and social behaviors. Today, some scoring systems such as those developed by Versium Analytics are moving far beyond scores for financial products to measure probabilities that a consumer will commit fraud, cancel a subscription, be at risk of identity theft, buy environmentally friendly goods, donate to charity, among others.
Racism Credit score systems are well known to contain racial bias and have been shown to increase racial disparitiesHow Algorithms Can Bring Down Minorities' Credit Scores as studies show that African American and American Latino populations have substantially lower scores than the white American population on average. Racial discrimination also results in impacts on the credit scores and economic security of communities of color—that ultimately, "entrenches and reinforces inequality by dictating a consumer's access to future opportunities".
Numerous studies have found racial disparities in credit scoring: 1996 study found African Americans were three times as likely to have FICO scores below 620 as whites and that Hispanics were twice as likely.Freddie Mac, Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America's Families (Sept. 1996) http://www.housingfinance.org/uploads/Publicationsmanager/9706_Aut.pdf . 1997 study found Black, Indigenous, and people of color [BIPOC] neighborhood consumers had lower credit scores.Fair, Isaac & Co., The Effectiveness of Scoring on Low-toModerate Income and High-Black Indigenous and people of color [BIPOC] Area Populations 22, Fig. 9 (Aug. 1997) http://market360online.com/sqlimages/1261/36693.pdf 2004 study found high Black, Indigenous, and people of color [BIPOC] zip codes to have significantly worse scores than non-Black, Indigenous, and people of color [BIPOC] zip codes.Brent Kabler, Missouri Department of Insurance, Insurance-Based Credit Scores: Impact on Black Indigenous and people of color [BIPOC] and Low Income Populations in Missouri (Jan. 2004) https://insurance.mo.gov/reports/credscore.pdf 2004 study found that African American and Hispanic consumers constituted over 60% of the consumers having the worst credit scores. 2004 study found the median credit score for whites in 2001 was 738, but the median credit score for African Americans was 676 and for Hispanics was 670. 2004 research study found fewer than 40% of consumers who lived in high-Black Indigenous and people of color [BIPOC] neighborhoods had credit scores of over 701.Robert B. Avery, Paul S. Calem, & Glenn B. Canner, Credit Report Accuracy and Access to Credit, Federal Reserve Bulletin (Summer 2004) https://www.federalreserve.gov/pubs/bulletin/2004/summer04_credit.pdf. 2006 studied US counties with high Black, Indigenous, and people of color [BIPOC] populations determining that those counties had lower average credit scores than predominantly white counties.Matt Fellowes, Brookings Inst., Credit Scores, Reports, and Getting Ahead in America 9-10 (May 2006) https://www.ciaonet.org/attachments/2800/uploads 2007 study by the Federal Trade Commission found that African Americans and Hispanics strongly overrepresented in the lowest scoring categories regarding auto insurance company's use of credit scores.Federal Trade Commission, Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance (July 2007) 2007 report found significant racial disparities in 300,000 credit files matched with Social Security records with African American scores being half that of white, non-Hispanics.Board of Governors of the Federal Reserve System, Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit 80-81 (Aug. 2007) http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf 2010 study found that African American in Illinois zip codes had scores of less than 620 at a rate of 54.2%. In zip codes that were majority Latino, 31.4% of individuals had a credit score of less than 620, and only 47.3% had credit scores greater than 700.Sarah Duda & Geoff Smith, Woodstock Institute, Bridging the Gap: Credit Scores and Economic Opportunity in Illinois Communities of Color (Sept. 2010), 2012 study examined the credit scores for about 200,000 consumers finding the median FICO score in majority minority zip codes was in the 34th percentile, while it was in the 52nd percentile for low minority zip codes.Consumer Financial Protection Bureau, Analysis of Differences Between Consumer- and Creditor-Purchased Credit Scores, at 18, Sept. 2012, http://files.consumerfinance.gov/f/201209_Analysis_Differences_Consumer_Credit.pdf
The outcomes for Black Americans because of this bias are higher interest rates on home loans and auto loans; longer loan terms; increased debt collection default lawsuits, and an increase in the use of predatory lenders. FICO has defended the system stating that income, property, education, and employment are not evenly distributed across society and it is irrational to think an objective measure would not exhibit these discrepancies. Tamara Nopper, sociologist at The Center for Critical Race & Digital Studies has stated that to solve the true issue of racism is not just to regulate it, as politics focus on, but to eliminate it in favor of public-owned banks that serve the community instead of shareholders.
A related concept of insurance scoring has also been shown to discriminate along racial lines, disproportionately harming black and Latino populations.
Employment Employers are unable to access credit scores on the credit reports sold for the purposes of employment screening but are able to acquire debt and payment history. Credit reports are legal to use for employment screening in all states, although some have passed legislation limiting the practice to only certain positions. John Ulzheimer, president of The Ulzheimer Group and the founder of CreditExpertWitness.com, stated in a CNBC report that, "[credit scores] indicate if you're in financial distress. These are attributes that are important to employers. For example, would you want to hire someone in your accounting department who can't manage their own obligations?". This approach has been noted as a discriminatory issue as the decisions can prevent one from gaining employment. Eric Rosenberg, director of state government relations for TransUnion, has also stated that there is no research that shows any statistical correlation between what's in somebody's credit report and their job performance or their likelihood to commit fraud. The National Consumer Law Center (NCLC) has stated that credit scoring perpetuates economic inequality by controlling access to opportunities in the future as well as important necessities such as employment.