Helping more American consumers access traditional financial services requires new knowledge of individual financial history. Currently, 1 in 5 adults in the United States do not have the credit history necessary to establish a credit score. An even larger proportion of Americans have a “thin” credit history, which means 4 or less accounts. Those with little or no credit history tend to come from groups historically underserved by traditional financial institutions. 3/4 of them earn less than $ 50,000 per year. Many of them are young, recent immigrants, members of the Hispanic or African American community, and / or recently widowed or divorced. When traditional financial services exclude a group of people, they often turn to expensive alternatives such as check cashing services or pawn shops.
A look at the invisibility of credit
The invisibility of credit costs consumers dearly. When lenders find that someone has a limited or no credit history, they charge that person higher interest rates on the loans. This person also faces higher premiums for auto, home and rental insurance. Someone who got a subprime mortgage pays $ 32,923 more in interest than someone who got a prime rate.
The problem is not necessarily that so many Americans are unworthy of credit. The problem is that current calculation methods do not give the full picture of the ability of some people to repay their loans. Benefit alternative data could move an additional 20 million US consumers to assessable credit bands. Many of these people could potentially benefit from top notch offers or near.
What are the alternative data sources?
Three examples of alternative data sources that credit rating agencies might include in their calculations are bank transaction data, lease payments, and telecommunications / utility payments. Using all three of these sources would require consumer authorization, but they could greatly benefit the invisible population when it comes to credit. The first source, banking transactions, could reduce the bad credit population by 50% if we consider all consumers. Data on banking transactions could increase the number of blue chip or top borrowers by nearly 4 million.
The next source, rents, is particularly important. Currently, many landlords perform credit checks on potential tenants as part of the rental process, but the rental data itself is not included in credit reports. For people who have only rented their home, this disparity puts them at a disadvantage alongside landlords, whose mortgage payments show up on credit reports. One of the most underused tools for building a credit history is rent payment reports. The majority of consumers believe that it is helpful to factor rental payment information into credit scores.
Finally, telecommunications and utilities data has wide reach across America. 90% of American adults have at least 1 utility bill in their name. 9 million consumers could become scorers thanks to payment information granted in telecommunications and public services. More than 7.5 million U.S. consumers could fit into the choice categories or nearly so once this data source is added to the calculation.
These three sources of data indicate a person’s financial responsibility. It’s time for alternative data to be added to US credit score considerations.