Hacking the Path to Expanded Credit Access

Right now, 1 in 5 adults in the US lack the credit history needed to establish a credit score.  These 25 million Americans are considered credit invisible.  67 million more Americans have a “thin” credit file, meaning they have 4 or less accounts relevant to credit score considerations.  Those with little-to-no credit history are among the most vulnerable in US society.  Many are young or new to using credit.  Some have recently immigrated to the United States. Others are part of the Hispanic or African American community, two groups historically underserved by financial institutions.  Just under half of this group makes below $25,000 a year, with over a quarter making between $25,000 and $50,000 annually.

Credit invisibility is costly.  A subprime credit score (which could be the result of limited data) can add an additional $33,000 of interest payments onto an average 30-year mortgage when compared to a prime score.  60% of Americans could not pay an unexpected $1,000 expense with their savings; 1 in 3 would have to borrow the cost.  Credit invisibility generates higher interest rates on personal loans and higher premiums on auto, home, and rental insurance. 

One way to reduce credit invisibility is to increase the amount of data credit reports look at when coming up with a score.  Use of alternative data could score up to 90% of previously unscorable consumers.  Predictions say that nearly half of the current unscorable population could become prime or near-prime borrowers as a result of this move.

What alternative data would credit reporting agencies use? Three possibilities exist, each requiring consumer permission. The first possible addition is bank transactions. The use of bank transaction data alone could increase the number of prime or better consumers by almost 4 million.  Another possible avenue is rental payments.  Right now, many landlords perform credit checks on potential tenants as part of the leasing process, but rental data is not included in credit reports.  Finally, telecom and utility bill payments could be examined; 90% of American adults have at least one utility bill in their name, increasing their visibility.