Keeping Score

The good news, for now, is that TXU Energy, the largest electric utility in Texas, has postponed its plan to use "credit scoring" for setting its rates.

Get used to hearing about credit scoring. It's the wave of the future for utilities, insurance companies -- even for phone, cable and Internet providers.

The basic idea is to charge different rates to different customers based on customers' FICO scores. The upshot will be that poor people, young people, the retired and the recently widowed will be charged more than other, wealthier people for an array of services.

This is indefensible.

A FICO score is an imprecise attempt to quantify the quality of creditworthiness. The use of such a score is understandable for lenders extending non-collateralized credit, such as credit cards. For collateralized home or auto loans, the overreliance on such dodgy formulas makes less sense.

The claim that this very rough measure of risk has any relationship to how insurers or utility companies ought to set their rates makes no sense at all.

Consumer advocates in Texas raised enough of a stink to delay TXU's plans to fleece the poor, but the delay is likely only temporary.

The real reasons for the delay may have more to do with TXU hoping to avoid paying fines for failing to fully disclose the impact of credit scoring on its new rates. As the Dallas Business Journal reports:

The company, which began notifying South Texas customers about their new rates last month, didn't tell customers who fell into the lowest credit ratings that they were being treated differently.

That can get you in trouble with the FTC, as Loren Steffy notes in The Houston Chronicle:

On [Sept. 10], the Federal Trade Commission said Sprint and AT&T agreed to pay almost $1.5 million to settle charges that they failed to notify applicants for phone service that credit reports were used.

You'll notice that the phone companies got spanked for not telling potential customers about the practice, not for the practice itself.

Steffy doesn't think much of the practice itself:

Other industries already are developing perverse uses for credit scoring. ...

The justification for using credit scoring for non-credit purposes is that there's a "correlation" between our credit histories and other behavior, like filing fewer auto claims. Bensema is proof those correlations are flimsy suppositions.

Credit bureaus say scoring has created a impartial numerical guide for granting credit by removing human error from the process.

Actually, it removes all humanity from the process. It creates a veil behind which companies can hide without taking responsibility.

"Bensema" is Howard Bensema, 74, who was born during the Depression and has made a lifelong habit of avoiding any kind of debt. The man paid cash for his house. As Steffy reports, this has resulted in him getting charged more for his homeowner's insurance:

While Bensema's habits are laudable, even inspiring, in our debt-laden times, in the eyes of his insurance company, they make him a credit risk.

Since the first of the year, he's been wrangling with his insurer and the state insurance commission.

Given his history, he feels he deserves the lowest possible rate, but he's not getting it.

The problem is that Bensema has no recent history of borrowing money and paying it back. That means he has no verifiable credit and a minuscule credit score. In citing its reason for denying him a better rate, his insurer listed the reason as "total credit less than optimum."

At one point, he was told "optimum" credit in his case would be debt of $128,000.

So because his debt is zero, Bensema pays more for insurance than those in hock.

It's not only the poor, but the prudent who are punished by FICO foolishness.

No reasonable banker would hesitate to extend credit to a customer like Howard Bensema. But bankers are no longer allowed to be reasonable. They must instead mechanically apply the crooked measures of FICO scores, whose many shortcomings include their inability to account for people like Bensema.

I often turn for ethical guidance to the great Hebrew prophets. Usually when I do so I have to abstract general principles of fairness and justice from their denunciations of the specific evils of the ancient world in which they lived. Yet here, in the case of TXU and the many insurance companies and others rushing to embrace credit scoring, I find the literal words of the prophets to be precisely accurate:

Woe to those who make unjust laws, to those who issue oppressive decrees, to deprive the poor of their rights and withhold justice from the oppressed of my people, making widows their prey and robbing the fatherless. (Isaiah 10:1-2)

Do not have two differing weights in your bag-one heavy, one light. Do not have two differing measures in your house-one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the Lord your God is giving you. For the Lord your God detests anyone who does these things, anyone who deals dishonestly. (Deuteronomy 25:13-16)

Hear this, you who trample the needy and do away with the poor of the land, saying, "When will the New Moon be over that we may sell grain, and the Sabbath be ended that we may market wheat?" -- skimping the measure, boosting the price and cheating with dishonest scales, buying the poor with silver and the needy for a pair of sandals, selling even the sweepings with the wheat. The Lord has sworn by the Pride of Jacob: "I will never forget anything they have done." Will not the land tremble for this, and all who live in it mourn? (Amos 8:4-8)

TXU shouldn't be worried about fines from the FTC. They should be worried about earthquakes, famine and death at the hands of the Assyrians.

Comments

[Rafe]

A couple of things. The first is that TXU is only charging extra to customers with poor credit scores in areas with competition for electricity. In areas where they are the monopoly provider, they do not do the credit scoring thing. Their problem is that in areas with competing customers, there are people who sign up with a power company, use electricity without paying until the company disconnects them, and then move on to the next company. I don't agree with TXU's solution, but that's the problem they're trying to address.

The second thing is that they don't use your FICO score, they use a credit score based solely on your record of paying utility bills. Still not perfectly applicable, but more applicable than a general credit score.

[taco cabana]

It's funny how some of those business types will accept a correlation between credit scores and certain behaviors as a valid reason to take some action, while still protesting the fact that global temperatures track with human CO2 production as "just a mere correlation".

not all....but certainly some....and probably too many.

[taco cabana]

I should've read Rafe's post first....

thanks for doing the homework.....

[bellatrys]

Yes, God forbid we should punish businesses who cheat and use up more resources than they pay for, or contaminate the ones they use, and do so routinely, because they might stop doing business with us! Let's just punish the poor and weak, who can't sic lawyers on us.

(Up here we have problems with companies abusing wastewater, mostly, but also sometimes with power taps.)

This "justification" sounds like the one that Prudential used to explain why it was okay to charge poor black people more for their insurance - because they were poor, and black, and therefore likely to stay that way or get poorer, and to have worse health because they were poor, it was okay to gouge them and make them poorer still, against the increased odds of them needing health care...

Sandals, buddy, *sandals.* When it all comes crashing down, the rich folks be eating their own kids, and looking for buyers for their own selves. Woe to the complacent in Zion!