Posted by Sarah Ohs
As I travel around the country talking to people about credit reporting, mainly in state capitals, perhaps the single biggest public policy challenge I hear about in the credit reporting system is the persistent issue of consumers who do not have information in their credit file to be assessed by a lender or creditor.
A consumer who has a thin credit file or no credit history can be shut out of the mainstream financial system, or they may have to pay higher rates for a loan or credit extension. This can lead to people paying higher prices for everything from a car loan to a cell phone. It is in all our interests to bring more people into the credit reporting and traditional financial ecosystem.
Why would some people not have a credit file? Most young people, for example, don’t have credit files until they begin getting credit cards or other financial products. Older people who have paid off their mortgage and are living on fixed incomes may not be credit-active and therefore have seen their credit file dwindle over the years. New immigrants might have had access to credit in their home countries, but that credit history is out of reach of most of the US credit reporting system.
Some people live outside of the economic mainstream, paying cash for most purchases, and not utilizing credit. These people may have the ability to repay loans but would likely be missed by the traditional credit system.
That’s one of the reasons why the credit reporting industry has been pushing to include new and different kinds of data in their reports. People may not be using credit cards, but they probably have a cell phone they pay off each month. They may not have a mortgage, but they are paying rent month after month. They may have paid cash for their car, but they are steadily paying the electric company to keep their lights on. All of these payments suggest that people will be able to pay back loans.
CDIA recently released a study detailing the value proposition of the credit reporting industry. As the study points out, new forms of data like rent and utility payments, can help signal to lenders that someone would also be a good customer for credit. According to the study (page 23):
“As the CFPB (the federal consumer protection agency – the Consumer Financial Protection Bureau) has noted, LMI (low-middle-income) households use very different “entry products” to begin credit histories under traditional reporting data, a fact that often delays credit availability to later ages and thus increases obstacles to economic mobility and long-term wealth accumulation.”
A constantly evolving credit reporting system will continue to provide new and different paths into the mainstream economy, providing economic opportunity for an increasing number of consumers. By making high-quality data available to lenders and others, including new kinds of data, CDIA members empower economic opportunity every day.