The Wall Street Journal had an interesting article a while back about the methods used by credit card companies to gain more information about your financial situation when determining whether you are credit-worthy or not (“Look Who’s Peeking at Your Paycheck“).
The Credit Card Act of 2009 set forth policies that allow credit rating agencies to estimate your income based on information found in your credit report. That data can be checked against self-reported income to provide credit evaluators with the necessary information to fill in the gaps when deciding whether to extend credit to a potential customer, increase an existing customer’s credit limit or who should be sent those pre-approved credit offers – currently the most widespread use of such techniques.
I may be misreading the article, but I got the impression that the author finds this to be a bad thing. I do not. Whether the public realizes this or not, data mining is quietly becoming the business technique of choice for those companies looking to improve the efficiency of their business. The income estimates provided by credit rating companies are usually just a range, or a value with an associated error. Those estimates are based on information already present in your credit report, as well as the information provided in other people’s credit reports. Data Mining is closely related to my Computer Science specialization, and from the case studies I’ve seen and academic papers I’ve read, the predicted values researchers come up with are shockingly close to their real-life values. If using utilizing that data allows creditors to lend money more responsibility, what’s the harm? There’s no privacy breach; the data is already there, it’s just being accessed in a different way.
Readers, what are your thoughts on this topic? Is this a good thing, or a potentially bad thing? What are some of the consequences down the road of using these income models?
Michael
Twitter: @michael_dink
TMI Fail
I agree with 20smoney. Credit Scores are "I love Debt" scores as my favorite financial advisor likes to point out. If you had a million dollars but no "credit", you could buy the house outright, but you couldn't get a mortgage for it. This doesn't make much sense to me. I think that we will start to see a gradual shift away from credit and "credit reports" are going to be less useful to companies in the end.
It's a real pain when credit card companies demand ever more information when filling up their new application forms.
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Collecting customer information to see what credit cards companies can market to you next. This has been happening for a long time and is even more prevalent in reward loyalty schemes.
nice post. thanks.