Lenders may soon have a lot more information for underwriting loans to consumers with little or no credit histories.
Experian Inc. has incorporated alternative credit data into its scoring model, something its rivals have all talked about doing for some time. The Costa Mesa, Calif., bureau is using consumers' phone bill payment records to help evaluate their credit risk, and hopes to soon add utility data to its scores.
Experian began working in April with one of the largest U.S. telecommunications carriers, said Laura DeSoto, a senior vice president, in an interview last month. She would not name the company, and said Experian plans to start using data from another in January.
"Hopefully there is going to be a snowball effect," she said.
Lenders have long used credit histories to help predict whether consumers are likely to repay loans. But those with little or no track record as borrowers are hard to evaluate.
According to a study released last month by the Information Policy Institute in Washington, utility and telecom data is not only the most predictive of payment habits but also the most common and the most easily incorporated into existing credit scores and underwriting models.
The bureaus and lenders have also been evaluating data on rent payments, prepaid cards, and payday advances.
Lenders "are saying, 'Help us figure out a way to underwrite consumers that don't have credit files,'" Ms. DeSoto said. They "have begged us to find a way to incorporate … [alternative credit information] into their standard models."
Roughly 5% of requests that come into Experian are returned with a "no hit," which means that the individual has no information on file, she said.
Michael Turner, the president of the Information Policy Institute, said that utility and telecom transactions "are more credit-like" than other kinds of alternative data - "you receive a service before you make a payment,"
In addition, utility and telecom companies "are relatively concentrated," he said, "so it's less challenging to get the information than getting many smaller companies to report."
However, there are some barriers to using alternative data, including the cost of reporting it. The providers must integrate data from various billing systems, before they can start sending data. They must also staff customer service centers to handle disputes, Mr. Turner and others said.
Ms. DeSoto said the phone company reporting to Experian had to integrate 14 billing systems.
In addition, there are regulatory concerns. Mr. Turner said that though only New Jersey and California expressly prohibit utility and telecom companies from reporting data to credit bureaus, the ambiguity of regulations on the issue makes companies nervous.
"I think they're overly cautious, but it's not entirely unjustifiable," Mr. Turner said. Many utility companies hope states will explicitly permit them to send payment histories to the credit bureaus, he said.
Ms. DeSoto said the telecom carrier reporting to Experian "did the cost-benefit tradeoff calculation" of reporting "and felt that these investments were worthwhile."
The telecom is reporting consumer data from five states and plans to be reporting on customers nationwide by December, she said.
Eventually it intends to report to all three credit bureaus, she added.
What incentive do these companies have to report on the payment habits of their customers?
According to an Illinois gas company, Nicor Inc. of Naperville, customers tend to pay faster if they know their information is being reported to the bureaus.
Nicor reports both positive and negative information to the credit bureau TransUnion LLC, and provides consumer education to describe the program, though the Chicago bureau does not use the data in its credit scoring. Nicor said that late and defaulted payments have fallen by 20% as a result.
Companies that report data can provide both "carrots and sticks," rather than just sticks, to influence customer behavior, Mr. Turner said.
Though utility and telecom data may be the easiest to use, the bureaus are continuing to explore other sources.
Experian, TransUnion, and Equifax are members of an advisory board that also includes Visa U.S.A., MasterCard International, and several processors and issuers, Ms. DeSoto said. The board is examining how prepaid cards can be used to build credit. Ms. DeSoto said the board is preparing a study on alternative credit data.
In addition, the Information Policy Institute, the Brookings Institution in Washington, and Experian are collaborating on a second phase of last month's study, which will examine the impact of utility payment data on consumers' credit scores, their ability to get credit, and their payment behavior.
The enhanced scores will be run through actual underwriting models from one or more credit card companies and one or more mortgage companies, Mr. Turner said. Results of the study are expected early next year.
"We need solid evidence to be able to say to the data furnishers that reporting, plus customer education, will enhance your cash flow and help consumers," he said.
