Senate should take up bill to help lenders see 'credit invisibles'
Even as the U.S. economy continues to grow, more than 45 million Americans — quietly and largely out of view — remain limited in their ability to fully participate in it.
These so-called credit invisibles either have a thin credit file or no credit history at all. In many cases, these consumers have yet to establish credit either because they’re younger — say, college graduates just entering the workforce — or because they have just arrived as an immigrant and reside in the U.S. on a semi-permanent visa. As a result, getting an affordable loan for a car or a house or the capital needed to start a small business is, at a minimum, more expensive for them or, worse, impossible.
There is strong evidence that helping this large population achieve a baseline credit status would significantly boost the U.S. economy. While such evidence has sadly been overlooked for years, pending legislation could and should change the status quo.
The Credit Access and Inclusion Act of 2017 would amend the Fair Credit Reporting Act to allow the reporting of certain positive consumer credit information, such as on-time payment histories, to consumer reporting agencies. In other words, the legislation would help consumers build up their credit history for something they’re already doing.
This bipartisan bill, which is sponsored by Reps. Keith Ellison, D-MN, and Robert Pittenger, R-NC, has already passed the House with a unanimous vote. If enacted, it would mean Congress strongly affirms such reporting to be in the consumer’s interest. It would also remove barriers, such as state and local laws that prevent public utilities from sharing positive customer payment data.
Right now, rent, utility and telecom bill payments are typically not included in traditional credit files. Instead, they are described as alternative credit data. Omitting the information, however, is unfair. Payments on these types of bills can predict whether a consumer is worthy of credit. While many consumers pay these bills on time, most landlords, utilities and telecom companies unfortunately only report when a consumer is behind on payments or an account is turned over to collections. So while credit invisibles assume they are building the foundation of a solid credit history, they usually aren’t.
The results are damaging. People without a track record of meeting such routine financial obligations are often unable to establish the financial identity required to gain access to mainstream, affordable credit. A lack of credit history often forces credit challenged consumers to turn to more expensive, short-term lending options, such as high-interest, payday loans.
When it comes to accepting and using utility and telecom payment histories, America is behind the curve globally. Lenders in Europe, Latin America and Asia are all utilizing this alternative credit data to underwrite loans.
Research suggests that crunching such alternative data would bode well for consumers and the economy. For example, when energy, utility and telephone firms report timely and late payment data alike, those Americans deemed credit invisibles could shrink to five million, according to a study by the Policy and Economic Research Council and the Brookings Institution. At Experian, we found including on-time utility payments on credit reports increased the number of consumers with a prime credit score by 15% and reduced the number of consumers marred with a subprime credit history by 50%.
In another study we conducted jointly with New York City Comptroller Scott M. Stringer, we found that reporting rent payment information to credit bureaus could help lift credit scores across the city. Indeed, the research showed reporting positive rent data to a consumer credit profile enabled as many as 28.7% of tenants with rents under $2,000 to gain a credit score for the first time.
As an advocate for consumers, we see this as a simple equation. More credit would mean more purchasing power for the American consumer. That is the kind of visibility that would be good for everyone.