Look Who’s Peeking at Your Paycheck
You may think your income is private information. But the credit bureaus may have your number.
And starting in February, your income—as estimated by the bureaus—may be used to help determine whether you get a new credit card.
Tuesday, the Federal Reserve issued its final rules related to last year’s Credit Card Act, which, among other things, will require credit-card companies to consider an applicant’s income or assets and current debts before approving credit. To provide flexibility, however, the Fed said that issuers can use “a reasonable estimate” of income or assets based on “statistically sound models.”
In hopes of such a decision, the three big credit bureaus have been updating or rolling out products that seek to estimate consumers’ incomes, based on information in their credit reports, such as the size and age of their mortgages or the size of their credit limits.
Beyond Credit Scores
Regulations and tighter credit standards mean credit-card companies and banks will need more details on our income and will gather more data on us.
New Fed rules will require credit-card companies to consider our income or assets and our outstanding debt when issuing cards.
Credit bureaus are offering income estimates based on information in our credit records, which may be used to grant new credit or to verify what we’ve reported.
Mortgage borrowers are now asked to provide income-tax records and to let the IRS release their returns to lenders.
The products also are responding to banks’ efforts to tighten credit standards in order to reduce losses and risk. “We look to fill in the blanks where they need the blanks filled in,” says John Cullerton, vice president, product management, for Equifax Inc., an Atlanta-based credit bureau.
Credit-card companies can then double-check what we have long reported ourselves against these estimates—which often don’t require consumer consent and aren’t available to consumers for review.
Indeed, lenders of all kinds are starting to collect ever more financial information from us and about us. Last summer, Fannie Mae began requiring mortgage lenders to verify borrowers’ incomes by checking income-tax filings. Instead of simply providing pay stubs and bank and brokerage account statements, home buyers now are being asked to provide copies of their tax returns and are also required to fill out an Internal Revenue Service form known as 4506-T that allows the IRS to release their tax filings to lenders.
Credit scores, which have been long a key factor in whether you get a loan or a credit card, may not be sufficient for many future credit decisions. With the new credit-card law requiring credit-card issuers to consider a customer’s ability to pay before opening new accounts, the Fed had proposed requiring people to report their own income or assets when applying for credit.
But retailers feared the proposed rules would squelch their ability to instantly open credit accounts at the cash register because shoppers wouldn’t want to disclose such personal information in the middle of a store. Both retailers and the credit bureaus asked the Fed to allow them use alternatives such as the credit bureaus’ income estimations instead.
Card companies already are asking for more detailed information in their online applications. Capital One is asking applicants to disclose how much they pay in mortgage or rent payments, how much they have in bank accounts and how much is in their investment accounts. Bank of America and Chase are requiring household income estimates.
In the past, the companies relied on self-reported income information. But lenders already are starting to use Experian PLC’s Income Insight product to verify what individuals report, says Brannan Johnston, vice president, income and deposits for the Costa Mesa, Calif., credit bureau.
Experian came up with its estimates by matching credit reports against a deep database of wages and interest and investment income and determining what information about the number of accounts, total credit, payments and other factors best predicted income.
Mr. Johnston says the income estimates also may be used to decide whether to increase a credit limit, since information on credit-card accounts may not be available or up-to-date. In addition, collection agencies have been interested in using the data to determine the most profitable accounts to pursue.
TransUnion LLC, a Chicago-based credit bureau, says most uses of its updated income estimates so far have been used for marketing pre-approved credit cards or other consumer offers, though lenders are also interested in the opportunity to calculate a debt-to-income ratio to see how extended a potential borrower might be.
Experian estimates income to the nearest thousand, while TransUnion offers a range. But both acknowledge the estimates are just that. Experian says that more than 85% of the incomes it estimates at about ,000 will indeed be below ,000—but that’s hardly precise. Chet Wiermanski, global chief scientist at TransUnion, said it isn’t uncommon for estimates to be off by ,000 or ,000.
Because the bureaus’ numbers aren’t exact, the companies say their contracts prohibit lenders and credit-card issuers from turning down customers based solely on the information. The estimates may, however, prompt a request for more details from borrowers, like pay stubs or tax returns.
Equifax, through its Work Number business, also provides employment verification and payroll data collected electronically from about 2,000 employers. Lenders, potential lenders, insurers and debt collectors can access the information without getting an individual’s specific consent if they’re using it for permissible purposes under credit laws.
If all this additional information makes you queasy, here are a few things to keep in mind:
- Since the income estimates are based on information in your credit report, it’s more important than ever to make sure the debt data in your report are accurate. Check your three reports at least once a year, or check one bureau’s report every four months.
- When you apply for a credit card, a loan or a mortgage, pay attention to what you’re consenting to. In the fine print on Bank of America and Capital One credit-card applications, potential customers consent to having both their credit checked and their employment verified.
In addition, if you are asked to fill out a Form 4506-T, be sure to date the form and to fill in the year or years for which the lender can request returns so you know exactly what information will be made available.
Be aware that all kinds of information is being collected about you. Less well-known credit bureaus, like L2C Inc., collect data on utility payments, cable and cellphone bills, payday loans, bank accounts and more, and the data can be used to provide credit scores on those with little or no traditional credit. Ultimately, how you handle all your bills—not just your mortgage and credit card—can make a difference in your options.
By KAREN BLUMENTHAL
Write to Karen Blumenthal at firstname.lastname@example.org