Helping more US consumers obtain access to mainstream financial services requires new insights into individual financial history.  Right now, 1 in 5 adults in the US lack the credit history needed to establish a credit score.  An even larger proportion of Americans have a “thin” credit file, meaning 4 or less accounts.  Those with little to no credit history tend to come from groups historically underserved by traditional financial institutions.  3/4 of them make under $50,000 a year.  Many of them are young, recently immigrated, a member 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 high-cost alternatives such as check cashing services or pawn shop loans.

A Look at Credit Invisibility

Credit invisibility costs consumers dearly.  When lenders see that someone has limited or no credit history, they charge that person higher interest rates on loans.  Said person also faces higher premiums for car, home, and rental insurance.  A person given a subprime mortgage loan pays an extra $32,923 in interest compared to someone who received a prime rate. 

The problem is not necessarily that so many Americans are credit unworthy.  The problem is that current calculation methods do not offer the full picture of some people’s ability to pay back loans.  Leveraging alternative data could move 20 million more US consumers into scorable credit bands.  Many of these people could potentially qualify for prime or near prime offers. 

What are Alternative Data Sources?

Three examples of alternative data sources that credit scoring agencies could include in their calculations are bank transaction data, rental payments, and telecom/utility payments.  All three sources would require consumer permission to use, but they could benefit the credit invisible population greatly.  The first source, bank transactions, could reduce the credit unscorable population by 50% if considered on all consumers.  Bank transaction data could increase the number of prime or better borrowers by almost 4 million.

The next source, rental payments, is especially important.  Right now, many landlords perform credit checks on potential tenants as part of the leasing process, but rental data itself is not included in credit reports.  For people who have only rented their housing, this disparity puts them at a disadvantage next to homeowners, whose mortgage payments do show up in credit reporting.  Rent payment reporting is one of the most under-utilized tools for building credit histories.  The majority of consumers believe it is helpful to have rental payment information factored into credit scores.

Finally, telecom and utility data has a wide reach across America.  90% of American adults have at least 1 utility bill in their name.  9 million consumers could become scorable thanks to consented telecom and utility payment information.  Over 7.5 million US consumers could move into the prime or near prime categories once this source of data is added to the calculation.  

All three of these data sources indicate someone’s financial responsibility.  It’s time for alternative data to be added to American credit score considerations.