It’s like getting a free scoop of ice cream 😊 Experian is rolling out a new product called Experian Boost which will allow you to “instantly boost your credit score”. Experian expects over 65% of consumers will see a boost to their credit score. Will you be impacted? What is the change? How will consumers “game the score”? What will lenders do?
What is changing? Experian is now allowing consumers to link various accounts to their credit file including bank accounts, cell phone bills, etc… to help gain better credit information on each borrower. On the surface this sounds like a good idea, but this is an “opt in” process for consumers. I would assume Equifax and Transunion will follow suit with similar products.
The risk for consumers: Equifax was recently hacked exposing social security numbers, personal information, credit card numbers, etc. Do you really want all your information including bank account numbers in one central location that was already compromised in the past? With bank account information someone could literally “clean you out” and steal all your money, identity, etc. Personally, I would not give anyone, including a credit agency, access to this information.
How will scores be gamed? Above I noted this was an “opt in” process. Consumers will only “opt” to allow positive accounts to be reported. For example, if you are late on your cell phone bill do you think you would “opt” to have that included in your credit file. This is highly unlikely. On the other hand, let’s say you always pay your internet bill, you likely would have that bill included. You could be late to ten different providers and not include any of this information in your credit file while you are current with one that would be included in the file.
It is not hard to see what consumers will do. Out of all their bills not included in a credit report today, they will choose bills that will increase their scores. For example, they will choose their cell phone and always pay this bill so that their score increases while excluding other bills
Why is this important? This change does not give lenders an accurate picture of a consumer’s “creditworthiness”. The system can easily be gamed to solely increase a credit score while excluding negative information
There is a big downside. The objective of a credit score is to measure the “riskiness” of a borrower and their ability to repay credit. This new model merely increases the score without including any possible negative information. Furthermore, it allows borrowers to “game” the score. Because of these changes, lenders have no way to correctly assess the riskiness of a borrower.
I’m all for more information on credit files, but it cannot be “opt in”. If additional information is going to be reported it must be all information or no information. Allowing consumers to “cherry pick” the information that is reported is a recipe for disaster.
Economics is frequently a zero-sum game with clear winners and losers. I suspect that lenders will react three ways (or a combination) to try and protect their lending quality:
- Lenders will increase their credit score requirements. If a substantial number of scores increased by 50 points, now the minimum score for a lender is 650 vs 600 before the change
- Many lenders might take higher loan loss reserves to compensate for the change. Higher reserves (or actual losses) decrease a bank’s profitability. They will “make up” this profitability loss by charging higher fees to other borrowers, account fees, etc… to ensure their revenue doesn’t decline
- As a lender, I will likely ignore the new score since it does nothing to help gauge the riskiness of a borrower. I assume most lenders will take this route as loan losses begin to pile up.
I’m all for more information on credit files, but it cannot be “opt in”. If additional information is going to be reported it must be all information or no information. Allowing consumers to “cherry pick” the information that is reported is a recipe for disaster.
Although the news of a higher credit score sounds great on paper, the reality is that most lenders will adjust their lending practices to compensate for these changes. The actual benefits to consumers will be muted and many could actually be harmed as higher fees are passed on to more qualified borrowers to compensate for losses and this change.
Resources/Further Reading:
- https://www.housingwire.com/articles/47738-experian-offering-potentially-higher-credit-scores-in-exchange-for-access-to-peoples-bank-accounts
- https://www.usatoday.com/story/money/2018/12/18/how-boost-credit-score-experian-new-tool/2349887002/
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).