Give Credit Where Building it is Overdue

Give Credit Where Building it is Overdue

Suze Orman, Credit Karma and others are breathing new life into the important effort of helping people see, track and improve their credit score.

My friends at CFSI and at PERC have long been active in trying to expand the dataset used to build ones credit report.  The idea was, and remains, that 50-odd-million people in the US have thin files or no files which renders them unscorable, and therefore denies them access to credit or only provides access to the worse priced and structured credit available.  Worse, since credit reports may also be used for hiring, insurance underwriting, and rental applications. Then there are another 100-odd-million who have full files, but not a great score.  For many this is an accurate reflection of not being a great risk, but for many more the credit bureau data simply don’t tell the whole (or the right) story.  Our objective is to increase access while keeping risk constant, NOT to increase access at any cost.

In 2010 Experian purchased RentBureau, giving that credit bureau access to millions of rental payers. Months later they made the unprecedented move to include RentBureau into its main credit report, thereby giving people with untraditional trade lines the ability to build good credit.  The only problem is that while many lenders use Experian’s credit report, very few use their credit score.  For practical purposes, until FICO uses a data type in its ubiquitous FICO Score, that data type is not helping you actually “build” credit en masse.  Of course there are tons of exceptions where lenders, themselves, use non-traditional data.

I think “credit building” should mean contributing data that is used broadly by large and small lenders for underwriting purposes.

Suze Orman is well aware of this problem – and the opportunity.  Despite the mountains of bad press her pretty progressive prepaid card has endured, two of the most interesting aspects relate to credit building (although she is careful not to mention that).  The first is a free credit monitoring service, offered by TransUnion and presumably subsidized by Suze.  It’s equivalent to what you’d pay $15 per month for.  Not a bad deal for $3/mo plus what amounts to a checkless checking account.

Free credit score pioneer, Credit Karma recently announced a free credit monitoring service, as well; also powered by TransUnion.  See a trend?

So, now we can track our score for free.  But what if it’s not great or it’s non-existent? How can we build it? Lenders have been reluctant to expand beyond traditional trade lines, largely for wont of homogeneity (magazine subscription data are quite different from your mortgage payment), scale (most alternative data resides with many parties each with smaller data-sets), efficacy (who cares if it exists if it isn’t predictive?) and cost (buying a waterfall of data to underwrite a post-pay mobile plan can seriously erode a customer’s long term value).  Regulators aren’t helping, yet.  The CFPB announced last week it will start tracking the credit bureaus.  I hope this will accrue to incentives for people to apply new forms of data and greater controls on what data are used and an expansion of what data may be used for credit underwriting purposes (currently largely covered under the Fair Credit Reporting Act).

I believe lenders are leaving billions of dollars on the table, and way too many consumers – who are stable, able and willing to repay many forms of debt – are denied access or are effectively subsidizing too many peers who default and therefore paying a lot.