About 45 million Americans lack traditional credit files, and the federal government is looking into whether alternative credit scoring models could bring more of these consumers into the financial mainstream.
The Consumer Financial Protection Bureau opened an inquiry last month into the pros and cons of using "alternative" data, such as rent and cellphone payments, to formulate credit scores. It is seeking feedback from the public and the credit industry.
Credit scores — many of which are also known as FICO scores, because they were created by the company Fair Isaac — are used by lenders to determine whether you can borrow their money, and what interest rate you will pay. The three-digit scores are created by applying a mathematical formula to information compiled by the three major credit bureaus.
Those bureaus — Equifax, Experian and TransUnion — generate credit scores and track your larger credit report, which includes information about your mortgage, car loans and credit cards, and whether you make payments on time.
However, many consumers do not have credit histories, or have files that are too spotty to create a traditional score. These consumers may have never had a credit card. Or, they may have had financial difficulties and stopped using credit. That puts them in a bind: Lenders are reluctant to do business with borrowers who lack a credit score, because they are unsure if they will pay back the loan.
Bolstering traditional credit scores with extra information could also help people with very low credit scores. The highest possible basic credit score varies, but is typically 850. Many lenders will not lend to people with credit scores of less than 620, noted Richard Cordray, the Consumer Financial Protection Bureau director. "But," he added, "they might do so if alternative data suggest that a particular consumer with such a score would be less likely to default on the loan."
Some credit companies have already begun using alternative data to help evaluate a consumer's creditworthiness.
The creator of the widely used FICO credit score recently introduced FICO Score XD, which uses data such as cellphone and cable payments along with public data like property records.
TransUnion, too, began offering a scoring model in 2015 that incorporates alternative data. The CreditVision Link combines a more detailed analysis of traditional credit scoring data over time with less conventional data, such as consumers' checking account histories and how often they change home addresses.
About 100 companies — primarily automobile lenders and online lenders — are using or testing the new model in credit decisions, said Mike Mondelli, a TransUnion senior vice president. In most cases, he said, the model lets lenders approve 20 percent more applicants than they would have otherwise. "There's a lot more data out there that consumers don't get credit for," he said.
Some consumer advocates have raised concerns about privacy protections and accuracy with alternative data, and those are areas the bureau said it planned to explore. The bureau says it "seeks to encourage responsible use of alternative data and modeling techniques while mitigating the various risks."
Ann Carrns writes for the New York Times.