Credit Scoring

Background

In determining whether to extend credit to consumers, lenders traditionally rely on credit histories and loan records. Today, other industries, including telecommunications providers and utilities, have adopted the use of credit scores to determine whether to require a security deposit and the amount of the deposit.

Utility providers’ use of credit scores raises questions about fair practice and access to essential services, especially for consumers of low incomes. Businesses contend that credit scoring gauges the financial risk posed by customers. However, several studies show that the reports on which credit scores are based frequently contain erroneous information as a result of mistakes or identity theft. In addition, many credit-scoring models do not include utility payment history—meaning that a consumer with a perfect utility payment history could still be required to provide a deposit or pay a higher rate because of a poor credit record in other areas (see Chapter 11, Financial Services and Consumer Products—Consumer Credit Protection, for more on credit scoring).

Credit Scoring: Policy

Consumer protections

In this policy: State

State policymakers should prohibit providers of residential utility services from using a consumer’s credit score to determine the rate the consumer must pay for essential service.

If state policymakers permit public utilities to require an applicant for utility service to pay a security deposit because of a credit score, the following minimum consumer protections should be required:

  • Credit scores should not be the only method of determining whether to require a security deposit.
  • Before having to pay a security deposit as a result of a credit score, applicants should have an opportunity to demonstrate creditworthiness through other means.
  • Utilities must disclose credit scores to all applicants required to pay a security deposit based on their score. The utility must also provide such applicants with the name and contact information of the entity providing the score and the rights and disclosures required by the Fair Credit Reporting Act, the Equal Credit Opportunity Act, and any state utility, credit, and collection regulations.
  • Utilities should disclose their use of credit scoring to all consumers.
  • Credit-scoring procedures should be applied uniformly to all customers and service areas.
  • Customers who pay a security deposit should have the right to receive a full refund of their deposit plus interest if they fulfill their payment obligations to the utility over a reasonable amount of time.
  • State regulators should review and approve the development and use of credit scores and the specific score below which a security deposit will be required.
  • Utilities should submit all relevant data to state regulators on an annual basis to help determine the impact of credit scoring on consumer access to essential services.