Credit reporting companies are using new data mining methods to add tens of millions of previously “unscoreable” consumers to their files, helping fuel the rebound in borrowing by people with low credit scores since the recession.
The companies, which include Atlanta-based Equifax, say the moves improve long-neglected folks’ access to loans and feed lenders’ need for new customers. Creating a bigger stash of credit scores that clients can order also potentially boosts their own revenues, they say.
Some consumer groups worry the broader credit score lists — heavy with new subprime customers — put more people in the cross-hairs of high-cost lenders.
“Getting a credit score is not always the best thing,” said Chi Chi Wu, with the National Consumer Law Center in Boston. “In our eyes, giving someone a loan that is expensive is setting them up for failure.”
By tapping ever larger computing power to keep track of a wider range of payments for longer periods, credit reporting agencies such as Equifax and Chicago’s TransUnion say they’ve added tens of millions of previously unscoreable consumers to their files.
“It really is a game changer in terms of the data elements that are in there,” said Charlie Wise, vice president of TransUnion’s Innovative Solutions Group. He said a recent test of the company’s updated system, CreditVision, showed that it has been able to generate credit scores for almost 27 million additional people.
The payoff could be mixed for some people, though.
According to TransUnion’s study, almost 90 percent of newly scored consumers fell into the “subprime” or “near prime” categories, meaning whatever borrowing they do could be at steep interest rates.
Equifax data shows lending to high-risk customers with low credit scores is at the highest level since the 2008 financial crisis for most types of loans except home mortgages. Subprime mortgage lending — the epicenter of the financial crisis — has grown slightly since last year, but is still only about a third of 2008’s level.
On the other hand, over 1.5 million auto loans — almost a fourth of all car loans — went to subprime customers in the fourth quarter, according to Equifax. That matched the volume in the first quarter of 2008, when subprime buyers accounted for 28 percent of auto loans.
Meanwhile, subprime credit card lending has surged well past 2008 levels. Such customers opened more than 7 million credit card accounts in the fourth quarter of 2014, an increase of more than 30 percent over early 2008’s total.
Wu said negative credit data that usually isn’t included in traditional measures — such as late utility payments — also could hurt some job-hunter’s chances with employers who run credit reports on potential hires.
“Having just negative data can be worse than no data,” she said.
Still, the broader measures could help some people get needed access to credit, said Tara Alderete, director of education at ClearPoint Credit Counseling Solutions in Atlanta.
“Is it better to have no credit or bad credit? Neither is good,” she said.
But if a potential borrower has little or no credit history and no credit score, good or bad, “the lender has nothing to go on,” said Alderete, and they’re much less likely to make a loan.
By taking a “deeper dive,” she said, it appears that the credit reporting agencies are trying to create more nuanced histories of consumers since the Great Recession. They’re capturing not only credit stumbles during the financial crisis, when unemployment and foreclosures soared, but also improved payment histories since then.
“They’re trying to take the guess work out of it,” she said.
Software at work
Credit reporting agencies have been working on computer and software upgrades for about a decade to come up with credit scores for the roughly one in six Americans who don’t have them.
The credit scores boil down payment histories, frequency of loan applications and other factors into a number ranging up to 850 on Equifax’s scale. Borrowers with a score below 640 or so on the scale are considered subprime or high-risk.
Credit scores can affect people in myriad ways, including their ability to get a job or a place to live, as well as the cost and availability of loans, utility services and insurance.
In 2006, the nation’s largest credit reporting companies created a joint venture, VantageScore Solutions, aimed at assigning credit scores to the 35 million to 45 million people without them. They include a wide variety of folks who raise barely a ripple in the credit pool: young adults just starting out; immigrants and others who grew up always paying cash for everything; oldsters who have paid off their debts and rarely borrow.
With only thin or nonexistent payment track records, such consumers can have a hard time getting loans or even getting jobs or renting homes in some cases.
VantageScore uses longer credit histories — typically 24 months worth rather than the latest six months of data, and data on accounts that traditional credit scores don’t use, such as utility, rent and cell phone payments, if it is available.
TransUnion developed its own alternative, CreditVision, about two years ago that counts 30 months of payment history and dives deeper into their bill-paying behaviors. The new scoring method, for instance, tracks how much money people owe, and whether they’re paying more than minimum payments.
The deeper data, he said, allowed TransUnion to generate credit scores on 26.5 million additional people who previously had no credit score under its traditional approach. It also shifted about 20 million people who were previously rated as “prime” to “superprime,” potentially lowering their borrowing costs.
“We’re seeing demand for this data really across the spectrum,” he said.
Equifax, likewise, came up with a re-tooled version of its traditional credit-scoring model that added in consumers’ utility and phone bill payments; that generated credit scores for about 25 million more people.
The alternative credit scores were initially aimed at clients such as utility companies, said Jason Flemish, Equifax vice president of consumer risk and credit, but about two years ago Equifax began marketing them to most clients except home mortgage lenders.
“The companies that have been using that data,” Equifax spokesman Tim Klein said, “have been finding new customers.”
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