Changing credit scores: Startups rethink the system

Keep score — or change it?

Credit scoring doesn’t work well for a lot of people. Those with low incomes, people of color and immigrants have been historically sidelined by the current system. Some of the nation’s most successful struggle with low credit scores despite their wealth. And if your fortune comes from crypto, you might as well be invisible to the credit bureaus.

Where some see flaws, startups see opportunity. Finding a way to accurately underwrite those excluded from the existing system could mean unlocking a whole new customer base for lending and investment products.

• It also entails a lot of risk, as inaccurately assessing borrowers’ ability to repay can result in costly defaults.
• Credit scoring is broken, but fixing it isn’t easy. FICO “is the dumbest system except for all the other ones,” Bullpen Capital general partner Eric Wiesen told Protocol. “Someone should clearly do this, but I am yet to find anyone successful at it.”

More data might be the answer. Rent or utility payments are not typically integrated into credit scores, for example.

• Some fintechs argue that doing so could improve many consumers’ scores. “Buy now, pay later” companies are also working to get their on-time payment data integrated into credit reporting.
• Consumer advocate Rachel Gittleman, financial services outreach manager at the Consumer Federation of America, argues that credit scoring is broken not because it doesn’t factor in enough information, but rather because it factors in too much. Much of the information tracked in a credit report is not predictive, she argues, like medical debt, which is a poor predictor of a consumer’s ability to repay because people do not choose to get sick.

Some think the problem requires new systems for evaluating credit. That could mean coming up with a replacement for the famous FICO score, or even the credit bureau system itself.

• Zest AI uses credit bureau and LexisNexis data to create its own score, which the company argues has less bias.
• Trust Science also uses AI to evaluate exponentially more data points than FICO does, but also collects and stores its own data, like a credit bureau.
• Others tailor their underwriting process for the specific lending products they administer. Line, for example, a company that issues small lines of credit for emergency expenses without a credit check, uses its own proprietary process. “We feel people are better than a number,” Line CEO Akshay Krishnaiah told Protocol.

Regulators have been eyeing cash flow underwriting, a common approach for evaluating those without much traditional credit history, for years. Considering crypto holdings is even trickier. Expect more guardrails to emerge as the industry matures, lest these attempts to fix the credit score cause more problems than they solve.

— Veronica Irwin (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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On the money

The Treasury Department will sound a warning on crypto in upcoming reports. A series of reports ordered by President Joe Biden are expected to lay out potential risks to consumers if crypto is not properly regulated. The reports will also recommend the U.S. continue working toward a CBDC, but only implement one if further study finds a clear national interest.