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Card issuers using obscure credit scores to evaluate prime borrowers

Kelly Dilworth

Why would a consumer with a near-perfect FICO score get rejected for a credit card?

An obscure consumer score that uses alternative data instead of traditional credit information could be to blame.

Earlier this month, Los Angeles Times columnist David Lazarus told the story of Joseph, a 43-year-old entertainment executive with a mortgage in good standing and an 820 FICO score. Joseph applied for an Alaska Airlines card from Bank of America and was surprised to learn he’d been turned down.

Bank of America’s rejection letter said that among factors considered in weighing his credit card application was the little-known Credit Optics score. Joseph was urged to contact another obscure company, the San Diego-based credit reporting firm SageStream, for more information about his Credit Optics score.

When he called SageStream, the customer service representative couldn’t tell him what went into his Credit Optics score or even what would constitute a “good” Credit Optics score.

Unlike traditional credit reporting companies, such as Experian and TransUnion, small consumer reporting companies such as SageStream don’t spend much time on consumer education.

Joseph was told he would have to formally file a credit report request by fax or mail to find out what kind of information the credit agency had on him. SageStream doesn’t make pulling that kind of information easy, either. You have to send a written request with your signature and accompanying personal information, including your birthday and Social Security number, and two copies of identification.

When Lazarus contacted Bank of America spokeswoman Betty Riess about the incident, she also declined to provide much information. “Betty Riess, a BofA spokeswoman, said only that the bank uses ‘supplemental scores’ such as Credit Optics ‘to take into account alternative information in making a credit decision versus just declining or approving based on a less predictive FICO score,’” wrote Lazarus.

A growing trend?
Banks have been quietly experimenting with alternative data to help “supplement” traditional FICO scores for years. In 2013, sources told me that card issuers and other lenders were just beginning to look at alternative ways to assess potential borrowers.

At the time, lenders hoped that alternative sources of information, such as utility and cellphone payments, would help identify creditworthy borrowers who were new to credit or hadn’t used credit in a while. Sources also told me that lenders were looking for more reliable ways to score consumers who were better credit risks than their FICO scores indicated.

By 2015, the practice had become more widespread, with 12 of the biggest card issuers partnering with FICO on an alternative credit score known as the FICO Score XD.

Also in 2015, the credit reporting agency TransUnion polled 317 lenders, including banks, credit unions and mortgage providers, and found that 75 percent of the debit and credit card issuers polled were using alternative data.

In some cases, lenders were using the data to score people with thin credit files or to get a broader assessment of people with low scores. But in other cases, lenders were using it to size up people who already had good scores and otherwise looked like good credit risks.

According to TransUnion’s survey, 38 percent of respondents said they were using alternative data to help assess consumers with prime scores.

Lenders told TransUnion that pairing alternative data with a traditional credit score was useful because it helped them identify consumers who had good credit but may be at risk of getting overextended. Moreover, 41 percent of respondents predicted that the use of alternative data to assess prime borrowers would become widespread.

That’s not the public story that banks and alternative data providers have been telling journalists, but it seems to jibe with the Los Angeles Times story about FICO high scorer Joseph, whose application for an airline miles card was rejected.

As alternative data becomes more widely used, proponents have been pitching it as an effective way to help consumers who have been poorly served by traditional credit scores. But as lenders test other ways to make use of alternative information, it appears that banks are also using it to differentiate other types of customers.

If so, that’s a big deal for the average borrower who’s been carefully tending his or her traditional credit scores and has been led to believe that the reports issued for free from the big three credit bureaus, Experian, Equifax and TransUnion, are all that really matter.

Now, consumers don’t have to fret about only what’s in their traditional credit reports. They also have to worry about the smaller, lesser-known consumer reporting companies that are quietly collecting their information and passing it on to lenders.

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