Changing the Playing Field for the Credit Invisible and Unscorable

Credit is important. It follows you for your whole life and you can’t start over. It’s what enables you to get a cell phone, utilities, insurance, a car loan, and even a home mortgage. Yet, many individuals don’t know how their everyday financial behaviors and payments can influence this critical aspect of your financial life. This is further compounded by a big problem with the U.S. lending system – the people who can least afford large debt payments face the highest borrowing costs. And while these people are clearly the most financially vulnerable, they are often the most credit responsible.  They must be if they often have to pay back loans at 26% or even 100% rates.

Who are the “credit invisible”?

Many financially vulnerable consumers fall under the ‘credit invisible’ or ‘credit unscorable’ categories. The Consumer Financial Protection Bureau defines these individuals as consumers with no credit history with a nationwide consumer reporting agency or not enough current credit history to produce a credit score. One out of 10 US adults are ‘credit invisible’ or ‘credit unscorable,’ and that means millions of Americans are not able to access credit

Some states are now taking the first steps to help. For example, in California this year, the Safe Consumer Lending Act (AB 1109) was introduced to cap the annual percentage rate (APR) at 24% for high-cost installment consumer loans of $2,500 to $10,000. This bill presents a great opportunity to highlight and address a serious issue in the consumer credit industry. While this legislation is a good start, the playing field must change, so that a person’s financial and credit rating is measured to better reflect the realities of the modern U.S. economy.

What can be done to help?

As the CEO of a financial services company, I have a fundamentally different perspective on consumer credit than those businesses in the world of payday loans, subprime credit, and predatory lending products. More change needs to happen, and not just in legislation and consumer outreach.
 
We need to see significant innovation in the financial industry. This is an opportunity for entrepreneurs and companies to focus on innovative business models or services that focus on credit building, from which many individuals would greatly benefit. With the vast amount of “big data” virtually at our fingertips, there should be opportunity to gather richer more relevant information to better understand an individual’s credit worthiness through their behaviors.
 
Algorithms and data used in today’s credit score calculation do not reflect our modern economic life. Instead, alternative data such as rent, utilities, child support, cash transactions, work salary/seniority, type of housing, and remittance history need to be adopted into credit scoring models.
 
For instance, let’s look at rent. 100 million people in the United States are renters, and most likely, rent is their biggest monthly expense. In the post 2008 economy where an increasing number of households are renter vs. owner occupied, rent payment history should be an important part of credit rating algorithms. This would provide a step in the right direction for the ‘credit invisible’ or ‘credit unscorable’ to establish a score for the first time or improve an existing rating based on their positive and documented financial behavior. And what this means for the ‘credit invisable’ or ‘credit unscorable’ is that they can gain access to appropriate credit products and reduce the cost of borrowing, enabling them to engage in important everyday activities that many take for granted.

That is the kind of equal playing field in the world of credit that I think we can all support.
 
About the Author: John Simpson, CEO RentReporters
John has played an integral role in RentReporters since 2013, when he joined as an investor and Board Member. Compelled by the opportunity to provide our country’s 100 million renters, particularly the 40 million who are credit invisible, the ability to improve or establish credit by paying their rent on time, he expanded his role in 2016 to become CEO. John’s passion for innovation began at Deloitte where he rose to the executive position of partner. John went on to serve as founder and CEO of CCG, a technology driven tax credit screening firm, and then as CEO and co-founder of HigherUp, an HR analytic solutions firm to empower small businesses.

*Views expressed are the personal views of the author, and do not necessarily represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.