You’ve likely heard of the three national credit bureaus: Experian, Equifax, and TransUnion. In fact, you have relied on the credibility of these agencies if you’ve bought a home or taken out other loans and lines of credit that required a credit check. You might even be one of those people who diligently tracks their credit score and makes a game of it to work toward a perfect 850. Regardless of which scenario applies to you, I bet you’ll be surprised to learn of a secret the credit world doesn’t want you to know—the fourth bureau.
Why it’s scary to consumers
Encounters of the fourth kind are terrifying. You know, UFOs taking people into space and boarding them onto motherships where they’re brainwashed and otherwise tortured by strange, slimy creatures. Yeah, the fourth bureau can be kind of like that. Well, maybe not that bad but it’s still pretty scary.
Fourth bureau information is essentially personal data that doesn’t show up on a traditional credit report but can affect your ability to get credit. This can be frustrating, scary even, to consumers who are denied credit opportunities but aren’t able to see a clear explanation of why.
Fourth bureau companies make money by storing your data and providing it, at a price, to those who request it. As we mentioned, this is data that you normally wouldn’t worry about. Perhaps one of the best examples is missed utility payments. Let’s be real, we’ve all missed a utility payment at some point, but it “doesn’t matter.” We tend not to worry about it too much because the missed payments aren’t reported to the credit bureaus and don’t get reflected in our credit scores.
But what if you were renting an apartment, applying for a job, or taking out credit at some institution that either used solely a fourth bureau or a combination of traditional credit checks and a fourth bureau report? Well, in that case you might be in trouble.
That’s because the fourth bureau keeps track of things like bank account information, utility bills, gym memberships, rental histories, and additional public records and credit inquiries. Let’s just all cross our fingers that overdue library books and movie rentals (back when those were “a thing”) don’t start coming back to bite us.
Here’s a look at some common forms of alternative credit data that have been associated with the fourth bureau. The list comes from The National Automotive Finance Association:
Trends in the Credit Industry
The credit game as a whole is changing rapidly. For instance utilities (again), rent payments, and so forth can help the underbanked establish credit. This is great for those who haven’t had access to traditional financial resources or for those who have relied on parents or family and don’t have a solid financial or credit history.
There is a catch with many of the services that help you report alternative data, however, in that many of them charge a fee. On top of that, using nontraditional data to build credit is inconvenient and sometimes unfeasible. For instance, in the case of rent payments, individuals need to ask their landlord to report their payment history, which adds inconvenience to the landlord’s workload and may make them less likely to help. Also, the effectiveness of many of these products and services is difficult to evaluate because it’s unclear how widespread their usage is.
We also continue to see momentum building around nontraditional credit scores. For instance, the craze surrounding sites like Credit Karma and Credit Sesame show a break with traditional reporting. Consumers might be less interested in their official FICO score and more interested in overall financial health or a “ballpark” estimate of where they stand.
On a similar note, we have heard quite a bit about VantageScore, a model which claims to take into account some nontraditional data. We wrote about this development as well, including how Vantage is making it easier to build credit. But, again, what’s unclear is how much this service is being used. How many lenders really rely on Vantage instead of Fico?
The Catch 22 Problem
The fourth bureau presents a classic catch 22. In one sense, we want consumers to have access to credit and the incorporation of this data may allow some of them to do just that. At the same time, though, it can damage the perceived credit worthiness of consumers whose primary focus has been to remain in accordance with traditional credit reporting. They may have let some things slip through the cracks, thinking that those didn’t really matter.
How the ‘Big Three’ are Involved
While you won’t have to worry about fourth bureau data when your FICO score is pulled (at least for now), that doesn’t mean that the traditional “big three” bureaus aren’t involved. In fact, all three of them have a hat in the ring when it comes to alternative data. Here’s a snippet from the TransUnion website regarding nontraditional data in credit reporting:
“The consumer benefits of ‘non-traditional’ credit reporting data are numerous. There is a growing body of work examining this topic—much of it supported by TransUnion. What’s becoming clear is that increasing the flow of payment information from energy utilities, telecommunications providers, cable and wireless providers and others into the credit reporting system yields positive results for consumers and local economies.”
As for VantageScore, their model has significant implications. According to their website, their inclusion of alternative data, along with a few other differences in their scoring, allows for 35 million consumers to have scores even though they would not have enough history to have a FICO score. Vantage says, “The model does this by using a broader and deeper set of credit file data as well as more advanced modeling techniques.”
Credit Files vs. Credit Reports
This brings us to a discussion of credit files and credit reports. While they sound similar, they are not the same thing. Credit files contain deeper data. Everything in a credit file does not make it to a credit report and certainly does not make it to a credit scoring model. According to the statement from Vantage, their model allows information to be included that FICO does not. It would be tempting to call this “fourth bureau” data, as many do, but the title is not appropriate.
Is the term “fourth bureau” outdated?
Now that we have discussed the trends of the credit industry, we may want to reconsider the term “fourth bureau,” altogether because it might be outdated. You see, by calling it fourth bureau we are implying that it includes things the big three bureaus don’t include. And, well, that may not true anymore (or at least it’s becoming less true each day).
Experian, Equifax, and TransUnion created the VantageScore together and the VantageScore is pulled from information in their credit files. This means that “fourth bureau” data, which in this case should be called “alternative data” or “nontraditional data,” is in use by the big three. While there are still likely some remaining data out there that aren’t on the radars of companies like Experian, Equifax, and TransUnion, this data comes from companies that should more appropriately be called data miners, rather than fourth bureaus.
How Data Mining Can Impact your Finances
Let’s take a look at when data mining really comes into play in our finances. It may have less to do with our ability to get credit and more with the prices we might pay for certain services. “Price optimization” is the name of the game, and it’s something companies are using to predict how much you will pay.
For instance, an article on credit.com recently reported that insurance companies are trying to predict how much you shop around for services. If they know you aren’t much of a price shopper, they will keep their rates higher and you will never know the difference. While this is arguably unfair and the ethics behind it are questionable, the good news is that you can control your own fate. Shop around to prevent this from happening, because it’s something you should be doing anyway.
For additional protection and awareness, you need to familiarize yourself with the companies who have a vested interest in your data. Here is a list of the top 10 data miners, according to the consumer protection site www.stopdatamining.me.
- Acxiom Corporation
- DataLogix Holdings, Inc.
- Epsilon Data Management LLC
- Equifax, Inc.
- Experian plc
- Fair Isaac Corporation
- Harte-Hanks, Inc.
- Intelius, Inc.
- Lexis Nexis Group
- TransUnion Corp
A few other common data miners that keep track of financial information are TeleCheck, ChexSystems, SCAN, CoreLogic Teletrack, Alliant Data, The National Communications, Telecom and Utilities Exchange, and L2C. And here is a bluebook that highlights some big data collection companies used primarily for marketing purposes.
Next Steps: What Consumers Can Do
As a consumer, you will need to stay protected against alternative data, those who mine it, and the potential impacts it can have on your credit. In today’s world, you should start to “worry” about all bills and personal information, including things like utility bills and gym memberships that haven’t historically been reported to the bureaus. By making sure you keep a close eye on these, you will continue to build smart financial habits and organizational skills. But not only that, you will also better protect yourself from future instances when nontraditional data may be used to evaluate your credit worthiness.
You should also consider taking action against data mining. Not only will the data lead to unsolicited mail and offers, but it will also affect the way companies interact with you. Consider opting out of lists and databases, using the Stop Data Mining website mentioned above. We hope this overview has been helpful and will enable you to navigate the data and credit world carefully and as an informed consumer.