Mellody Hobson is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Tom: Good morning!
Mellody: Good morning, Tom.
Tom: What is on tap this morning, Mellody?
Mellody: Well, Tom, I want to talk a little bit about some of the developments that are occurring around credit scores and credit checks. Normally, we all think of the topic of credit, and assume that it is just a static subject. Everyone has a credit score, and nothing ever changes, right? Wrong! Recently, we have seen a shift in the way that credit bureaus and companies are operating, and that became very clear last week when T-Mobile launched a new plan that works to move past credit scores in some ways.
Tom: Great! Lets start off with T-Mobile. What did they do?
Mellody: All cell phone companies run a credit check every time you sign up for a new contract. The reason? They want to be confident that you’ll pay your bill. Well, on Thursday of last week, T-Mobile shook things up a bit when the company’s CEO published a blog post that exposed what they called the wireless industry’s dirty little secret – that half of Americans are denied access to many of the deals that are advertised due to their credit scores.
Noting that 63% of Americans have scores below 750, the company is changing the way that it evaluates its customers, rolling out a plan that will allow existing customers to renew their service, and in turn get upgrades and new plans, without a credit check. Instead, T-mobile will determine their decision based on whether they paid their bill on time in the previous 12 months. That is a pretty significant shift, as your credit score is a compilation of all of your credit history over 7 years. So 12 months of just your phone bill is not nearly as telling.
Tom: Why are they doing this?
Mellody: There is one big reason here, Tom: customers. While the move is interesting and good for people, it is not being done for high-minded reasons. First, T-Mobile recognizes that there is a very large pool of people out there that want these premium deals – and who are willing to spend the money – but who are not currently able to access them due to their credit score.
The company also recognizes that a comprehensive credit check may be overkill when it comes to evaluating a cellphone bill. A mortgage? Of course a credit check in necessary! But a cellphone bill? No. In response, they are making the bet that they can tap into their current customer pool and move some of them to higher priced plans and phones, as well a drawing in other customers who are willing to commit to 12 months of paying their bill on time in order to get the phones and plans they want. In the end, it’s a savvy business proposal, and a win for nearly everyone.
Tom: Are there other companies that are looking at new ways to evaluate credit?
Mellody: There are. Right now, we have not yet seen other major retail companies announce a plan quite like the T-Mobile proposal, which essentially relies on internal information for the credit evaluation, but depending on how this goes, that might not be too far off. However, there are an increasing number of companies out there that are moving beyond a credit score. For example, many companies have stopped doing credit checks on job applicants, believing that it is a poor evaluation metric. And more importantly, there are a number of new companies looking at new and different ways to evaluate creditworthiness. Remember last year we were talking about how your Facebook friends could impact your credit? Well the future is now!
There are new approaches out there that are looking at a very broad array of things to determine whether or not you are credit worthy – everything from household buying habits and social network connections to whether potential customers use only capital letters when filling out forms, and the amount of time they spend online reading terms and conditions. All of this in an effort to get a more accurate picture of people’s habits, and in order to be able to more effectively extend appropriate credit to a broader number of people who may not fit within the metrics that are predominant now.
Tom: So we are seeing different evaluations. There has also been the shift to provide more access to our scores, right?
Mellody: There certainly, has been, Tom. Just this month, President Obama announced that more than half of U.S. adults will have free access to their fico scores this year, mostly via their banks. That’s a really big step forward for consumers, who have been frustrated for years by the fact that they had restricted access to the scores, even though it directly impacts your ability to borrow money and participate in other parts of the economy.
The announcement was driven by the fact that JPMorgan Chase, Bank of America and Ally Financial are joining Discover, which started offering free FICO scores to cardholders last year. USAA announced it would offer its customers their Vantagescore, which is a FICO competitor. And last fall, Citigroup announced it would join the free credit score group early this year. This shift is a big deal, Tom, as it allows more transparency and more informed decision-making for American consumers.
Tom: Looks like there is some progress for consumers! Always great to have you on, Mellody!
Mellody: Great to be here, Tom!