Could Your Social Media Footprint Step On Your Credit History?
Updated at 5:30 p.m. ET Nov. 11 to include information from the credit reporting companies and the Consumer Financial Protection Bureau.
In December 1912, financier John Pierpont "J.P." Morgan testified in Washington before the Bank and Currency Committee of the House of Representatives investigating Wall Street's workings of the time.
The fascinating record produced from the testimony called him the "uncrowned king of finance" and recounted this exchange between Morgan and the committee's lawyer, Samuel Untermyer:
Untermyer: "Is not commercial credit based primarily upon money or property?"
Morgan: "No, sir, the first thing is character."
Untermyer: "Before money or property?"
Morgan: "Before money or anything else. Money cannot buy it."
Further on, Morgan also produces this financial proverb material: "A man I do not trust could not get money from me on all the bonds in Christendom."
A century later, this memory has found new life in a growing number of stories about alternative ways of calculating credit scores, apparently promoted by the co-founder of a startup called Lenddo.
It's a modern-day iteration of the idea of character as a commercial value: companies going online to try to figure out your financial potential from posts and connections from Facebook, Twitter and, yes, LinkedIn (professional contacts there are "especially revealing of an applicant's 'character and capacity' to repay," another creditworthiness startup founder told theEconomist, in 2013).
The latest wave of coverage comes from a story in the Financial Timesabout FICO, the credit scoring company, headlined: "Being 'wasted' on Facebook may damage your credit score."
The FT says FICO is developing a way to price loans to "millions of people who have historically been off the grid" and so the firm is "looking at data on a spectrum" from credit card repayment history to information volunteered on Facebook or other social media.
"If you look at how many times a person says 'wasted' in their profile, it has some value in predicting whether they're going to repay their debt," FICO CEO Will Lansing is quoted in the FT as saying. "It's not much, but it's more than zero."
If you get the impression that FICO might use your Web posts to dock your credit scores, you're not alone. And it's a big deal: Consumer credit reports can be used not just for loan and credit card decisions, but also hiring, insurance and housing.
But here's a clarification from FICO spokeswoman Christina Goethe:
"The headline about social media posts created a misperception. FICO is not utilizing Facebook data, or any other type of social media data, in calculating FICO Scores. Mr. Lansing was talking generally about the fact that different types of data have different levels of predictive value."
What FICO is doing is piloting a new type of score, called FICO Score XD, which would add telecom and utility bills (from another credit reporting company Equifax) and property and public records (from LexisNexis) to its calculations to score people who can't be scored otherwise, for instance those without a credit history.
That cohort is large. The Consumer Financial Protection Bureau estimates that about 26 million Americans have no credit history and so are invisible to the system. Another 19 million have insufficient or outdated history to get a commercially available credit score.
Goethe, in an email, explains how it works:
"FICO Score XD is currently designed to only score consumers that are not scorable with traditional credit data. The algorithm checks to determine if a traditional FICO Score can be generated first, and if it can, the traditional score is returned to the lender. If it cannot, FICO Score XD provides a second chance to get approved. The goal of FICO Score XD is to expand access to credit."
The approach is similar at the three big credit reporting companies: Experian, Equifax and TransUnion. Representatives at all three told me that their companies are not using social media for consumer credit scores or even to verify people's identities. (Note: Business lending is a whole different animal.)
But like FICO, TransUnion and Experianare also experimenting with new kinds of data elements that may help assess people whose existing credit history isn't enough for a traditional score.
TransUnion calls its new type of assessment CreditVision Link, and according to spokesman David Blumberg, it includes property, tax and deed records, checking or debit account and payday lending information, and other sources.
"The score includes alternative databases of over 3 billion non-traditional data records collected on over 260 million adult Americans," Blumberg says in an email. "These alternative data sources have proven to accurately score more than 90% of applicants who otherwise would be returned as no-hit or thin-file by traditional models."
And here's a similar concept explored by Experian, described in an email by spokeswoman Susan Henson:
"We are constantly looking at ways that we can expand the breadth of our credit report and expand ways that consumers can build credit. An example is rental data which Experian has been adding to credit reports for several years allowing millions of consumers the opportunity to build and rebuild credit by paying their rent on time. Telecommunications and utility data also holds great promise for credit building, and including this type of data on credit reports is slowly being adopted by those industries."
Knowledge Is Power
The first thing to know is this: You have to be told if information from your file has been used against you.
Bob Schoshinski is an assistant director in the privacy and identity protection division at the Federal Trade Commission. He says if your consumer credit data causes a bank, an insurer or landlord to reject your application or give you worse terms than you could have gotten, they have to give you what's called an "adverse action notice."
It's the kind of notice, Schoshinski says, that explains: We rejected your application or gave you a worse deal because of your credit report or score, and here's where we got the report or score and here are the major factors that determined our decision.
Employers who want to peek in your background through a credit or consumer report have to give you even more of a heads-up with a "pre-adverse action notice," Schoshinski says, in case potential hires want to dispute anything on their report before a decision has been made.
And that's another thing you can do under the Fair Credit Reporting Act: Make sure that your information is correct, wherever it may have been collected. Consumer reporting agencies must investigate disputed information and then correct or delete things that are wrong, incomplete or unverifiable.
"Generally speaking the FCRA is neutral as to what kind of data a credit reporting agency, or a lender, or an employer uses," including social media, Schoshinski says. "You have to have procedures that assure a maximum possible accuracy of the information you're providing."
The FCRA also prohibits credit reports from including negative stuff that's more than 7 years old (for instance, arrests) and leaves no room for shady uses of credit reports: If a bank, insurer, employer or landlord doesn't acknowledge that their decision stemmed from a credit report, "then they're violating the law," Schoshinski says.
When You're Found Online Directly
Things get murkier when the social media data is collected not by consumer reporting companies, but banks/employers/property owners/insurers themselves. Those instances are not overseen by the FCRA and are guided by other anti-discrimination laws and ethics standards (for example, fair housing laws), whose relationships with social media are still getting sorted out, too.
NPR's Yuki Noguchi has delved into the thorny issue of employers sleuthing on social media accounts of potential new hires. She found hazy rules of what hiring folks can do with the information the a job seeker makes publicly available, especially given that discrimination can be hard to pinpoint when it's based on intangible and sometimes subconscious impacts of things like scanning a Facebook page.
The Equal Employment Opportunity Commission took on the topic in March 2014, issuing a recap press release with this note from panelists' observations: "To the extent that employers conduct a social media background check [to identify and recruit good candidates], it is better to have either a third party or a designated person within the company who does not make hiring decisions do the check, and only use publicly available information."
Spokeswoman Kimberly Smith-Brown says that workshop remains the EEOC's latest formal action on the topic of social media.
The FTC's Schoshinski says: "Our main concern is about consent. If someone wants that information to be out there and wants to put information out about themselves, through social media or otherwise, then that shouldn't be a concern.
"But if there's information that someone either doesn't know is going to be put out there or hasn't been told if they enter information here, it's going to be shared with thousands if not millions of people, then that can become a problem."
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