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The Dangerous Implications of a
"Right" to Free Credit Scores

Progress Snapshot
Release 6.8, May 2010

by Berin Szoka*

View as PDF

Under the Fair Credit Reporting Act of 2003, every American has a right to a free credit report once a year from each of the three major credit bureaus—Experian, TransUnion, and Equifax. A search on any major search engine for "credit report" will lead the user (via the top search result) to AnnualCreditReport.com, which guides the user through getting these free reports after verifying their identity—a process that takes about 15 minutes. Having these reports empowers us all to take responsibility for verifying the accuracy of the borrowing history used to make assessments about our credit-worthiness, and also to detect fraud or identity theft.

But for some lawmakers, this freebie isn't enough. Sen. Mark Udall's (D-CO) "Fair Access to Credit Scores Act of 2010"[1] would create a new entitlement: the free credit reports available at AnnualCreditReport.com would be accompanied by free numerical credit scores, too. In his floor speech about the bill, Udall insisted on the need to ensure Americans "access" to their credit scores. But we already have such access: When you pull your free credit report, each bureau will offer you your credit score, too, for just $7.95. Or, if you want to recheck your report and score between your free annual reports, you can just search for "credit score" and quickly buy a report/score package for $15-16.[2] So what Sen. Udall really means is that we shouldn't have to pay for our own credit scores—because they belong to us, don't they?

No, actually, they don't—and that's why Udall's proposal would, if enacted, set an important precedent taking us one step closer to information socialism. The critical difference between credit reports and credit scores is that reports are just descriptive, factual statements about our financial history: account statuses, outstanding balances, payment patterns, etc.—while credit scores are the products of a sophisticated, patented process of statistical analysis based on that raw data—and thus clearly the intellectual property of the credit bureaus.[3] Of course, credit reports are costly to produce because someone has to collect, verify and organize all that financial data. But consumers do indeed need to know the objective facts in their reports (missed payments, etc.) so they can play an active part in correcting errors in their data—and that kind of involvement makes the credit system work better, too.[4] That's why Congress struck the right balance with the Fair and Accurate Credit Transactions Act of 2003, requiring the credit bureaus to give consumers one free credit report annually (and free additional reports in certain cases of fraud or adverse reports or for those on unemployment or welfare[5]) but also allowing the bureaus to charge a "fair and reasonable fee, as determined by the [Federal Trade] Commission" when a consumer requests their credit score or additional reports.[6]

The issue raised by Sen. Udall's proposal isn't really about copyright, but the basic approach of copyright is relevant: When someone transforms raw data into something useful, like a credit score, government generally protects that—rather than expropriating it! Sen. Udall would essentially socialize this profoundly important and socially beneficial data service, nakedly taking the intellectual property of companies that expend huge resources not just collecting and verifying data, but also in honing the effectiveness of the elaborate algorithm they use to transform that raw data into a piece of information that allows us all to take advantage of the miracle of credit at prices commensurate with the risk of lending to us.

Senate Banking Committee Chris Dodd (D-CT), the author of the financial reform bill that Udall has proposed to hang his proposal onto as an amendment, declared in a his floor speech after Udall introduced his amendment that Americans have a "right to know what their credit score is."[7] In a sense, perhaps they do: If credit bureaus were refusing to make those scores available, he would be understandably upset. But of course that's not happening—and it's difficult to imagine why it ever would, since the credit bureaus are in the business of giving consumers access to their credit scores whenever they want it. Again, the credit bureaus give their customers the opportunity to purchase a credit score in the process of getting their free annual credit report for just $7.95 and they sell the scores and reports year-round, too, for not much more. It's hardly unreasonable that consumers should be expected to pay some of the costs of administering the credit system, given all that t does for them.

The Miracle of Credit

Unfortunately, as a seemingly costless information service, credit scores are easy prey for the "free lunch" mentality now regnant in Washington: Once a "right" to something is asserted, all talk of who actually has to pay for that something goes right out the window, and policymakers simply assume that someone will be found, eventually. Indeed, if we think about credit scores at all, most of us probably resent and/or fear them. Yet credit scores, and the entire credit reporting system, are truly one of the wonders of information capitalism and a boon for consumers. Before they developed, lending decisions were far riskier because lenders didn't really know whom to trust with their money. Thus, lenders had to build in a risk premium into their interest rates to account for the fact that some users might default or fall behind on payments. This punished good borrowers and rewarded bad ones. Getting a loan was difficult, often required special connections, and was often arbitrary and thus sometimes downright discriminatory.

This situation was bad for everyone. While nobody likes being in debt, we often forget how radically empowering credit can be in allowing us to expand our opportunities in life. For example, Startup Nation cites Small Business Administration data that "more than three out of five small enterprises will borrow to start or grow their ventures, frequently using credit cards, home equity loans and loans from friends and family to get started."[8]

The great Peruvian economist Hernando de Soto explained in his masterpiece The Mystery of Capital, that the lack of clear land titles is a key reason why so much of the developing world stays mired in abject poverty—denying the poor access to credit by preventing them from using the one asset they have (the piece of land they live on, however modest) to secure loans and thus lower the risk to potential creditors of lending to them.[9] That's the extreme example of a dysfunctional credit market and its calamitous consequences for prosperity and economic mobility. But it illustrates the broader point, and credit scores aren't so very different: They offer a single, objective measure of how credit-worthy someone is and allow those without the assets needed to secure loans (think why your car and home loan interest rates are so low!) at far lower interest rates than they could obtain if they had to try to essentially "interview" for loans in the way we interview for jobs.

Practical Problems with Udall's Proposal

What's particularly puzzling about this proposal is that it presumes that the credit scores generated by the credit bureaus are the all-powerful, static and universal numbers that rule our financial lives. In fact, many lenders use the credit bureaus' credit reports to generate their own credit scores using formulae customized to the risk issues particular to the circumstance. In particular, lenders rely on the FICO Score generated by the Fair Isaac Corporation, which would not be subject to the free credit score requirement under Udall's proposal. (Consumers can, of course, by their FICA score for just $15.95.[10]) Singling out the three credit bureaus for special punishment doesn't make much sense, and suggests a special animus against them.

If the goal were to increase transparency in lending, it might make more sense for lenders to disclose to potential borrowers the score (or corresponding percentile) upon which a lending decision was based when notifying the credit applicant of their lending decision. Of course requiring this would raise its own tough questions, but at least it could be said that lenders are in the business of making loans rather than, like the credit bureaus, offering credit scoring as a product for sale in the information marketplace.

The reason this would make more sense is that getting your credit score once a year along with your free credit report doesn't tell you nearly as much as you might think; indeed, it might breed a false confidence—or alarm. Credit scores aren't like property tax assessments, fixed every year and simple. Instead, they are highly variable, depending heavily on recent behavior to predict likely future behavior. You might think it unfair that your high score can plummet suddenly because you miss a credit card payment, say, but how is a lender to distinguish between an innocent error and real financial distress? If you can't keep up with your bills, you're a credit risk, and trying to suppress that information only makes the credit system work less well for everyone in terms of higher credit costs.

Again, consumers need to take some degree of responsibility for themselves if our miraculous credit system is going to continue to allow us all convenience and flexibility in our consumption, while also fueling countless start-ups and small-scale entrepreneurs. That means checking their free credit report for factual errors to ensure its reliability—but if they want their scores, too, they should have to pay for them because, again, someone has to pay for the costs of keeping the credit system going.

The "What's Yours is Mine" attitude behind Udall's proposal is deeply antithetical to America's capitalist tradition. It destroys the fruits of capitalism and corrupts the ethic of private property with an infectious, avaricious spirit of entitlement. If I have a right to the product of your algorithm, you'll have to find some other way to pay for it—or service will inevitably suffer. Money doesn't grow on trees, and neither do credit scores! When policymakers start tinkering with the credit system, the stakes could hardly be higher: The Internet would be a very different place if an entrepreneur couldn't use a good credit score to borrow the money needed to give their best shot at a clever business idea—and so would Wall Street and every Main Street in America.

But the broader principle at stake is no less profound—nothing less than whether the government should compel private companies to give away their products for free. Where else will that pernicious principle lead? Should companies be required to give away software products? What other information products will someday be socialized citing this precedent? This larger question holds grave consequences for the future of our digital economy. If consumers have a "right" to the fruits of any innovation based on information about them such that these new products must simply be given away, why would anyone invest in such unprofitable innovation? As digital age guru George Gilder taught us, "privatizing the risks and socializing the rewards" is a sure-fire investment and innovation killer.[11]

The "Financial Reform" Christmas Tree

Udall proposes to hang this amendment on the sprawling "financial reform" legislation currently under fierce debate in the Senate.[12] Since most Senators are focused on the broader future of our financial system, "Too Big to Fail," bank break-ups, and bank bail-outs, it's not surprising that so little thought is being given to what socializing a small but critical piece of that system means for the financial system as a whole, or the broader information.

As I've previously noted[13], the "Wall Street Overhaul" bill passed by the house in December would, in the words of Jim Miller, FTC Chairman from 1981 to 1985, "put the FTC on steroids."[14] With vastly expanded powers, the FTC could impose sweeping new regulation, touching virtually every sector of our economy. While those powers probably wouldn't extend to compelling giveaways of products and services as Udall's amendment would do, I shudder to think what the regulatory environment of the future will look like if both go through.

I worry even more about the legislative process that allows such radical ideas to be tacked on as extra ornaments on a huge "Christmas Tree" of a bill that no one really has time to think through.[15] If "Too Big to Fail" leads to "Too big to Read," we may all suffer. As John Steele Gordon recently noted in Commentary:

Roscoe Conkling, senator and Republican political boss of New York State in the 1870s and 1880s, once remarked that "when Dr. Johnson said that 'patriotism is the last refuge of a scoundrel,' he was obviously unaware of the possibilities inherent in the word 'reform.'"[16]

A Final Note About Privacy

It's nearly impossible to separate any discussion of the credit bureaus from the intense hatred directed at them by some self-appointed "privacy advocates."[17] That's exactly the kind of motive that could drive efforts to cripple those companies by any means necessary. But it's worth pointing out the irony here: Credit scores significantly enhance our privacy by serving as a trusted, objective metric that substitutes for the vast amount of data we might otherwise have to share about our finances every time we applied for a loan.

Rather than attacking it, policymakers should be celebrating the beauties of our modern, evolving credit system.

Related PFF Publications

* Berin Szoka is a Senior Fellow and Director of the Center for Internet Freedom at The Progress & Freedom Foundation. The views expressed in this report are his own, and are not necessarily the views of the PFF board, fellows or staff.

[1] S. 3247, 111th Cong., http://thomas.loc.gov/home/gpoxmlc111/s3247_is.xml.

[2] TransUnion and Equifax offer scores for $15.95 at www.myfico.com/Default_RV.aspx and Experian for $14.95 at www.experian.com (Under "Experian Credit Score and Report: The U.S. average credit score is 693. What is your credit score?" click on "Get Yours Today.")

[3] The FCRA defines a credit score as "a numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default." 15 U.S.C. 1681g(f)(2).

[4] It's a common anti-capitalist canard that lenders just want an excuse, any excuse, to charge higher interest rates. In fact, they want the most accurate risk assessment possible so they can charge the right "price" for their product. As with any market, over-charging doesn't necessarily increase revenue because of the interplay of supply and demand.

[5] 15 U.S.C. 1681j (b) — (d).

[6] 15 U.S.C. 1681j(f).

[7] Video available at http://markudall.senate.gov/?p=blog&id=575.

[8] Gerri Detweiler, The Stages of Building Business Credit, www.startupnation.com/series/106/9150/business-building-stages-where-are-you.htm

[9] Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2003).

[10] http://www.myfico.com/Default.aspx

[11] George Gilder, Tumbling Into the Telechasm, Wall Street Journal, Aug 6, 2001, www.gilder.com/Gilder.comNews/GGWSJ08.06.01.htm.

[12] On May 4, 2010, Sen. Udall proposed inserting his bill as an amendment to Sen. Chris Dodd's Restoring American Financial Stability Act of 2010, S.3217. See S.AMDT.3778, http://hdl.loc.gov/loc.uscongress/legislation.111samdt3778.

[13] Berin Szoka, How Financial Overhaul Could Put the FTC on Steroids & Transform Internet Regulation Overnight, Progress Snapshot 6.7, March 2010, www.pff.org/issues-pubs/ps/2010/pdf/ps6.7-FTC_on_steroids.pdf; see also Berin Szoka, FTC Chairman Leibowitz: Just Trust Us, We Won't Abuse Vast New Powers!, March 21, 2010, http://techliberation.com/2010/03/21/ftc-chairman-leibowitz-just-trust-us-we-wont-abuse-vast-new-powers/.

[14] Brody Mullins & John D. Mckinnon, FTC's Powers Would Grow Under Financial Overhaul, Wall Street Journal, Oct. 29, 2009, http://online.wsj.com/article/SB125677809189114853.html.

[15] The Christmas Tree Bill, Time Magazine, March 26, 1956, Wall Street Journal, http://www.time.com/time/magazine/article/0,9171,824103,00.html

[16] John Steele Gordon ,The Global Reform Dodge, Commentary Magazine Blog, May 3, 2010, www.commentarymagazine.com/blogs/index.php/gordon/288381

[17] Adam Thierer & Berin Szoka, What Unites Advocates of Speech Controls & Privacy Regulation?, Progress on Point No. 16.19, www.pff.org/issues-pubs/pops/2009/pop16.19-unites-speech-and-privacy-reg-advocates.pdf.




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