The Credit Scoring Conundrum

Frank A. Pasquale, University of Maryland Francis King Carey School of Law

Document Type Working Paper


A bad credit score may cost a borrower tens of thousands of dollars, but it is not clear how it is calculated. The formula is a trade secret, immune from scrutiny. Lenders are moving beyond scoring to “credit analytics,” which tracks a consumer’s every transaction. Buy generic products instead of branded ones, and you may find your credit card’s interest rate rising and its limit falling.

This essay critiques automation in the consumer-facing side of the finance industry. Reputation systems are creating new (and largely invisible) disadvantaged groups, disfavored due to error or unfairness. You may be one of those affected, labeled in a database as “unreliable,” “high medical cost,” “declining income,” or some other derogatory term. Since it is nearly impossible to find out exactly how one has been categorized by data brokers and other information collectors, those disadvantaged by secret, automated processes can’t even organize for better treatment. This essay documents their plight, and how current law fails to help. I propose new principles to guide the Consumer Financial Protection Bureau, the Federal Trade Commission, and other regulators as they address the growth of unaccountable financial data sources.