Millions of people in the United States don’t use traditional banks, don’t have credit cards and are barely a blip on credit scoring systems if they show up at all.
These consumers — referred to in the industry as having “thin” credit files or no files — often find it hard to get a traditional loan or even passing background checks for some jobs.
But most of them have telephone and utility bills, complete with a payment track record.
So credit agencies are pushing new scoring systems using payment history for phone or Internet service, utilities and other essential services. Others have beefed up data caches to include job history, assets, income and even rental history.
The bureaus say this will bring millions of people into the financial mainstream while helping lenders make safer credit decisions. It also means the bureaus can offer their paying clients reports on more people.
Consumer groups are all for opening credit to the under served and responsible lending, but they worry about the accuracy and fairness of these databases. The chief concern: low-income people could be hurt by histories of delinquent utility bills, which are more common than for other income brackets.
Many of those with thin credit are low- to mid-income people whose credit was damaged for one reason or another, taking them out of the mainstream. Another large block consists of immigrants, both legal and illegal. Millions more are young adults just starting out, as well as those who simply eschew credit in all forms.
In 2009, about 9 million U.S. households, 7.7 percent, were unbanked, according to the Federal Deposit Insurance Corp. The percentage is highest among minorities — 21.7 percent of black households and 19.3 percent of Hispanic households are unbanked, for instance, compared to 3.3 percent for whites.
In Georgia, 457,000 households, or 12.2 percent, are considered unbanked, a percentage second only to Mississippi and tied with Washington, D.C., according to the FDIC.
Millions more nationwide are considered “under-banked,” including people with basic bank accounts who don’t use credit cards or other traditional services.
Atlanta-based Equifax is among the companies turning to these alternative forms of data to gauge credit worthiness for credit card companies, auto lenders and mortgage firms. As many as 35 million people in the United States aren’t scored or barely register on Equifax’s traditional database.
“This under-served population, who has never had access to credit, will now have access to credit,” Rick Smith, chief executive of Equifax, said this past summer.
Millions of borrowers’ credit scores remain damaged from the recession and its fallout. But scores are slow to reflect when consumers move beyond earlier economic woes. The new scoring systems should help augment the existing reports and help people with thin files.
Smith called the use of such data “transformational” for millions of consumers.
“The banks [will be able to] make a decision,” Smith said. “Yesterday they couldn’t underwrite you; today they can price you better.”
Equifax said millions of those with little or no credit data should become creditworthy when the additional information is taken into account.
The Boston-based National Consumer Law Center, however, fears that if utilities report all payment data, it could hurt millions of low-income consumers who sometimes struggle.
Most power and gas companies only report payment data to credit bureaus when they’ve written off the account and sent the unpaid bill to a collections agency, said John Howat, NCLC senior policy analyst. That’s usually long after a single missed payment.
Millions of consumers are late on utility payments each month, but their delinquency typically isn’t reported until default.
Further complicating that measure: Some states require consumers to miss a payment in order to receive energy assistance.
Late payments, if reported, could affect employment prospects and the ability to rent a home, Howat said.
“Our concern is a bad score could be just as bad as no score,” Howat said.
Utility and phone company data isn’t the only alternative information. Several credit agencies have developed enormous libraries of data on employment history, assets, income and even the track record of rental payments.
Lenders are more often using this data when evaluating all customers, not just those with limited histories.
Recent regulatory changes require lenders take into consideration not just a credit score, but also a borrower’s capacity to repay.
LexisNexis Risk Solutions, based in Alpharetta, uses algorithms to calculate credit worthiness by looking at assets owned like houses and aircraft, the length of time a person lives in one place and tracks legal actions that could affect risk.
People who own assets such as a home or airplane are 20 percent safer credit risks than the average, while bankruptcies, liens or felony convictions make a person three times riskier on average, said Mark Luber, vice president for analytics for LexisNexis Risk Solutions.
By using alternative data on top of the traditional credit score, lenders are able to increase the rate of approval, he said.
“These people who apply for credit are trying to cross over into the mainstream of the financial world,” Luber said.
