Anish Acharya, VP Product at Credit Karma (who I’m lucky to call a good friend) recently shared his thoughts on everything wrong with credit bureaus. It’s an excellent thread.

The core loop is (of course) that consumers build credit for access to financial products and the way they manage those financial products drives their score and access to future financial products.

Both parts of the loop suffer from inefficiencies that badly harm consumers - mispricing and “misscoring”. Let’s consider them in turn.

On mispricing: It’s well understood that there is massive mispricing problem for financial products; for example, the dispersion of APRs given a fixed credit score on an auto loan are tremendously wide despite all of these folks being equally credit worthy [lender view].

This problem is increasingly getting solved by companies like Credit Karma who are making these markets efficient with technology. The magnitude of this problem is staggering (in the auto loan example above mispricing costs US consumers ~$31bn per yr).

On “mis-scoring”: What’s much less well understood is that consumers are also fundamentally “mis-scored” - in many cases their score and report doesn’t represent their true credit worthiness and this mostly acts to their detriment.

For example, there are many millions of erroneous / fraudulent collections on consumer’s reports and many consumers are either unaware they exist or are unaware that they can be remedied.

Or, as in your example, folks who you wouldn’t consider a “lender” like utilities or medical put small collections on your report which you would pay if you knew about them. Sadly many consumers never notice and will be punished when they need credit next.

Also consider the cold start problem where you need credit to get credit, which usually means getting a credit card. However most of these consumers have been paying rent and utilities, which can (and are just starting to be) used as an indicator of credit worthiness.

As a result millions and millions of consumers have access to worse financial products than they’re entitled to and those who have the least disposable income and are the most vulnerable are being punished the most by this market inefficiency.

This is also why the whole cottage industry of “credit consulting” firms exist, though they often charge exorbitant fees and are predatory in their own right.

Bureaus want to do the right thing and efficiently score consumers. However there is an incentive mismatch in that their customers are lenders and other buyers of the data. So they’re only incentivized to make credit files as representative as their customers (lenders) demand.

In the (near) future we’ll live in a world where consumers have credit files that represent their true credit worthiness and are always steered into the best, cheapest sources of capital.