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The Curiosity Behind E-Scores

The Curiosity Behind E-Scores

Just as the Consumer Financial Protection Bureau is making big moves to ensure transparency in the credit reporting models, a new trend is emerging. The e-score, which is an online calculation of our credit scores, is making huge waves in the financial sector – and for many, it’s not good.


Part of the problem is the secrecy behind the e-score. No one is quite sure what purpose they serve, who uses them and how they’re calculated. The only certainty is that online companies rely on them to help them determine if you’re a customer they want. You’ll never know those scores, they’re calculated by “a handful of start ups and a few financial services”. Confused? You’re not alone.

These online scoring companies specialize in predicting what consumers will or won’t do and they use so much data in the algorithms, it’s unlikely anyone could make heads or tails of it – unless you’re the statistician, of course. After all the data is collected, entered and then analyzed, what follows is a digital ranking of every single person who’s ever bought even a bag of peanuts online.

If you’re thinking it’s difficult enough to understand our FICO scores, you’re definitely not going to want to attempt understanding the e-score. A few of the factors include what we do for a living, how much our homes are worth, how much money we earn and how many luxury items we own – and how many of them we bought online. We’re not entirely sure, but we’re thinking if you bought that luxury yacht online, your e-score might be high.

Socioeconomic Status

It’s true that credit scores, based on personal credit reports, have been around for decades. And direct marketing companies have long ranked consumers by their socioeconomic status. But e-scores go further. They can take into account facts like occupation, salary and home value to spending on luxury goods or pet food, and do it all with algorithms that their creators say accurately predict spending.

So who’s using these scores? You might be surprised. The list is growing – and it’s growing fast. A large number of companies, including banks, credit and debit card providers, insurers and online educational institutions are using these scores to pick and choose who they wish to do business with. In many ways, it’s not unlike other characteristics companies use; who receives a black credit card offer and who receives, say, a platinum offer. But they’re also being used to determine what kind of cable packages you’re offered.

Worse, these numbers can actually determine where you are in the “wait line” while holding for a customer service representative. Sounds discriminatory, yes? Unfortunately, the regulations in place are ill equipped to handle this kind of preferential treatment. That said, the government as well as consumer advocates have voiced their concerns. Specifically, they’re concerned a “sub prime class of people” could be born of these efforts.

Scandals and Falls from Grace

There has been a small – a very small – number of people who insist the entire financial sector should be annihilated and rebuilt. Let’s face it – from the banking scandals to the hard falls from grace of those banks’ leaders to the robosigning scandals – the list goes on and on – and the only definitive effects this country has seen are those in power have a far better chance of not only succeeding by playing unfairly, but thriving. These new e-scores will only push those efforts further. If a bank or mortgage company gains access to an e-score that’s not to its liking, it might result in every other financial entity doing the same. That would create an entire class of folks who don’t stand a chance at securing a mortgage, a credit card or even cable services for their home.

One company, eBureau has a CEO who takes pride in what his algorithms determine. Gordy Meyer insists a potential consumer can be “sized up” in less than one second. He laughs and says, “It’s like gambling”.

He says his services answer questions such as, whether a consumer is “worth pursuing”, whether that consumer is “legitimate” and other questions that other credit bureaus cannot answer due to federal laws. He admits his scores are determined without all of that pesky regulatory consideration; after all, it would be illegal if he were to use these dynamics in a more ethical environment. Incorporating regulated consumer information for marketing is against the law. Now, though, it could be the entire system might be against the wall.

These kinds of consumer value scores have already begun to worry federal regulators who say the scores could

measure individuals against one another, using yardsticks that are essentially secret. Another is that the scores could pigeonhole people, limit their financial choices and channel some into predatory loans,

they say.

Now, the FTC is on the secretive nature and has its own statement;

The scoring is a tool to enable financial institutions to make decisions about financing based on unconventional methods,

says David Vladeck, the director of the bureau of consumer protection at the Federal Trade Commission.

We are troubled by these practices.

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