“Does your age impact your credit scores, yes or no, and why or why not?”
This is one of my favorite trick questions to ask when I’m making a presentation on the topic of credit scoring. It’s one of those “simple question, complicated answer” deals that trips people up. So what do you think: does your age impact your credit score?
The knee-jerk answer is no, credit scoring systems don’t consider your age because it would be illegal to do so. And we all know that lenders aren’t allowed to discriminate against someone because of their age. The problem is that it’s not that simple and here’s where it gets complicated…
The Equal Credit Opportunity Act (or “ECOA”) is the law that prohibits lenders from discriminating against consumers because of things like age, race, religion, gender, and a variety of other factors. It’s also the law that allows for the use of age as a factor when considering a credit related application. According to Regulation B of the ECOA, “In an empirically derived, demonstrably and statistically sound, credit scoring system, a creditor may use an applicant’s age as a predictive variable, provided that the age of an elderly applicant is not assigned a negative factor or value.”
What this all means is a lender could use your age against you AND a lender could use a credit score that penalizes you because of your age, as long as a protected class isn’t penalized. The protected class in this instance is what the FDIC calls the “elderly,” which is defined as someone who is 62 years old or older. So now that we know it’s perfectly legal to consider someone’s age when extending credit, do you want to change your answer to the original question?
Despite its legality, your age is still not considered in credit scoring systems. There are a few reasons why it isn’t:
There are other ways to skin that cat
Your date of birth is a part of your credit reports, so it would be simple to calculate your age and use it in a scoring system. But, it’s not really necessary because there are other age “proxy” variables that are similarly valuable and much less offensive to Joe Consumer. For example, you can use the date of birth of the credit report, rather than that of the applicant. All you have to do is use the oldest account to set the report’s age and you can calculate the average of all of the accounts on the credit report. And while none of these are going to give you the same numeric value as the consumer’s age, it is still valuable in credit scoring systems. The age metrics associated with your credit report are worth a collective 15% of the points in your FICO score. To put that in perspective: it’s worth more than inquiries.
It’s a public relations loser
Can you imagine someone from a bank or credit bureau explaining to the media or a consumer advocacy group that your age can cause you to have a lower credit score? Nobody in their right mind would wish that one on their worst enemy. Although, it’s kind of ironic that the underwriting of auto insurance overtly includes the evaluation of someone’s age, gender, and marital status, in most states. Any of the guys reading this remember how bad their auto insurance premiums were when they were under 25, single, and driving a sports car instead of a minivan?
You may be forced to ignore empirical evidence
The rule in the ECOA says you cannot assign a negative value to anyone who is 62 or older. That’s the law. But, does research support that law? I’ve never seen any study that quantifies borrower risk by age group that includes people who are part of the “elderly” class. But, if that research says that folks who are older than 62 pose elevated credit risk, then a credit scoring system is going to want to penalize them because of the research results. ECOA prevents that from happening, so including age in a scoring model could be counterproductive. Having said that, the lost “age” value could likely be made up somewhere else within the model.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.