For most consumers, those scores are based on records of loans they have taken out in the past and how well they have paid them off. Information on credit cards, auto notes and mortgages are all housed in the Big Three national credit bureaus — Experian, Equifax and TransUnion. Lenders use formulas developed by companies such as FICO and VantageScore to analyze the data and determine how likely each person is to repay.
Government regulators, financial firms and consumer advocates have launched extensive education campaigns in recent years to make sure that consumers understand what goes into their Big Three credit reports and how that affects the cost of a loan. Lawmakers and federal officials have crafted rules to try to help consumers understand what’s in their files.
Including data from utility payments in traditional credit scoring increases the number of consumers with credit scores.
Consumers can end up paying thousands of dollars more than someone with better credit.
But little attention has been paid to the firms that target consumers outside the mainstream financial system. Often they are students, immigrants or low-income consumers who do not qualify for traditional loans or choose not to use them. Instead, they rely on a makeshift system of payday lenders, check cashers and prepaid cards — none of which show up in the Big Three. Without a paper trail of credit, these consumers are virtually shut out of the traditional banking system.
Mondelli recognized this problem a decade ago during the telecommunications boom. Cellphone companies wanted to tap into this market but had no way to figure out who was risky and who was worth signing up. But Mondelli knew these people left financial footprints somewhere — he just had to find them.
“Credit bureau data alone is valuable but not the complete picture,” he said in an interview.
The trail led him to a jumbled marketplace of financial and other personal information that was ignored by the main bureaus. It includes magazine subscriptions, cable and utility bills and child care tuition. Some firms collect medical payments, prescription drug history and insurance claims; others mine public records for bankruptcies and liens.
LexisNexis, whose parent company bought ChoicePoint three years ago, handles background checks, tax assessments and criminal histories. Bounced checks can be tracked through Chex Systems, TeleCheck or SCAN. Payday lenders report to a company called Teletrack. Alliant Data compiles information on so-called “installment payments,” industry jargon for recurring monthly fees such as gym memberships.
The National Communications, Telecom and Utilities Exchange collects account information for 63 of that industry’s largest firms — although the group’s director won’t specify which ones. Members use the data to decide who to approve for new accounts and the size of a security deposit.
These dossiers go into what the industry calls a “black box” — a veil of secrecy surrounding the origins of the information, how it is analyzed and who buys it. Consumers have no voice in those decisions, even though the information concerns their lives. The data could help struggling borrowers prove they are ready for the financial mainstream. But the data can also penalize them for actions they didn’t realize were being tracked, forcing them to pay far higher interest rates or more fees.