After 5 decades of private credit reporting, it’s time for a change

Credit reports and credit scores play an outsized role in our economic lives. They determine our ability to obtain credit and its price; whether we can buy a house or rent an apartment; and even our ability to get a job. A credit report can make or break a consumer’s financial life. Yet this system has serious structural problems, which have become more glaringly apparent as the COVID-19 pandemic decimates the health and financial well-being of millions, especially Black, Brown, and low-income communities. The Biden administration should address these structural problems by implementing one of its bold proposals, establishing a public credit registry.

Credit reports contain far too many errors for something so vital to our economic well-being, with one in five consumers having an error, and one in 20 having a serious error that would affect their ability to obtain credit or its pricing. Consumers are frustrated by the Kafka-esque system devised by the credit bureaus to process disputes, which often blocks them from getting relief. Credit reports and scores are used for inappropriate purposes, such as employment, insurance, and even immigration (their use is required as part of the Public Charge Rule.) Most critically, credit scores reflect and perpetuate thorny racial disparities, playing a role in financially entrenching America’s original sin.

To be clear, credit scores do not explicitly take race into account. But they do reflect a legacy of discriminatory public policies. From the conception of this country with slavery in its founding documents, to more recent policies such as redlining, Black and Brown families have been systematically excluded from wealth-building opportunities that benefitted white families.

This exclusion has produced vast racial wealth inequality that continues growing with the disproportionate financial toll inflicted by COVID-19. It is little surprise that, locked out of wealth passed down across generations, Black and Brown consumers disproportionately have lower credit scores. And because consumers with poor credit are more likely to be denied loans or charged higher interest rates, the cycle of disadvantage reinforces itself.   

Many of the problems with credit reporting stem from its very nature. An oligopoly of three private companies governs our financial reputations, trading in and profiting from our data. We are captives because we cannot opt out of the system. Instead, creditors and other companies are the credit bureaus’ customers and constituency. There’s not much incentive for credit bureaus to create a system that works better for consumers, including disadvantaged communities. We can see the upshot of this dysfunction where credit reporting issues are often the number one source of complaints to the Consumer Financial Protection Bureau, including during this pandemic.

But there is a way forward. Among President-elect Biden’s economic proposals is an innovative plan to establish a public credit reporting agency, based on policy developed by Demos. This solution recognizes that access to consumer credit is a public good and would promote that public good by establishing a public institution to replace the private companies that now control credit reporting. A public credit reporting agency or registry would also be an effective way to build economic power for Black and Brown households by putting equity at the center of its decisionmaking and enabling them to exercise greater control over their economic lives. 

A public credit registry could have, as a central mission, the development of credit scores that encode as little historic discrimination as possible. They could draw on data sources beyond lending, but only when these data have been publicly shown to be more predictive and beneficial to consumers and to minimize racial disparities. 

Possibilities include allowing consumers to opt in to reporting cash flow data from bank accounts or rental payments. A commitment to shifting power demands that alternative data sources be used only when consumers opt in, in order to place greater control in the hands of consumers. We would also have more confidence that a public credit registry given access to alternative data would respect consumers’ intent and privacy, using the data for the purpose authorized by the consumer and nothing more. The public credit registry could also exclude or discount certain adverse information that is less predictive or bad policy, for example medical debt or predatory credit products, which disproportionately targeted Black and Brown communities.

The Biden administration should implement its public credit registry proposal to shift power away from an oligopoly that exercises inordinate control over consumers’ financial prospects and towards a fairer system that better respects consumers and reduces racial inequality.

Amy Traub is an associate director for policy and research at Demos, where she focuses on consumer debt, job quality and job creation, and policies to build the American middle class. Chi Chi Wu is a staff attorney at the National Consumer Law Center, where she focuses on credit and consumer reporting issues on behalf of low-income consumers.