The writer is a contributing columnist, based in Chicago
Tens of millions of Americans, many from minority groups, are paying more than they should for cars and homes because traditional lenders underestimate their creditworthiness.
Government officials, big banks and social justice activists agree that closing America’s racial wealth gap depends in part on solving the problem of the “credit invisibles” – people without credit file – and those who have too little information on their file to mark them by conventional methods. Traditional credit scores are largely based on credit cards, car loans and mortgages. Without a score from one of the big three national credit bureaus (Experian, Equifax, and TransUnion), people often can’t get consumer, mortgage, or business loans, or pay beyond the odds because lenders are not sure they will repay.
The US Consumer Financial Protection Bureau reports that 26 million Americans (one in 10) have no credit history and another 19 million have poor or no credit history. This year, Experian found that nearly 106 million U.S. consumers are “unable to get credit at prevailing rates” because they are either credit invisible or have a subprime or lower credit score.
The CFPB says this problem hits minority communities hardest: 45% of consumers in low-income neighborhoods — many of whom are from minority backgrounds — are either invisible to credit or impossible to assess by traditional methods. Some 15% of black and Hispanic consumers have no credit history (compared to 9% of whites).
Today, financial institutions are experimenting with ways to circumvent this problem, using data that was not previously factored into credit scores. “It’s our job to hold up a mirror with the least distortion possible to every American consumer to ensure they are not underestimated,” says Kevin King, vice president of LexisNexis Risk Solutions, a pioneer in the use of “alternative credit data”. to help lenders assess borrowers.
“Do you have a professional license? That tells me you have the option of getting a job, from a cosmetology license to a security guard license, and we’re looking at asset ownership, higher education data” and other documents public, he says.
His company studied the low-income 60637 ZIP code on Chicago’s South Side and found that while only 57% of credit applicants in 2020 and 2021 were assessable with traditional methods, 95% could be assessed with alternative data.
Other companies are experimenting with using rent payments, utility bills, and even video streaming subscriptions. I used one of the most popular tools – Experian Boost – to boost my credit score above the critical 800 threshold to “exceptional”, simply by allowing Experian to link information about my Netflix payments, d electricity and telephone to my score, which had been depressed because I don’t have a car loan or a mortgage.
Jared Evans is community manager at JPMorgan Chase’s new banking and finance education center in ZIP code 60637, an effort to foster inclusion in these banking and credit “wilderlands”. Just down the street is a pawn shop: the kind of place where people pay beyond the odds, if they can’t use traditional moneylenders. Evans – credit unseen when he tried to buy his first car – says the need to build credit isn’t discussed “around the kitchen table” in many homes in this area. He aims to change that.
Daniel Martinez, Chicago mortgage originator for Self-Help Federal Credit Union, says he uses “alternative data” to assess borrowers — and finds them good credit risks. “We will see someone with an 800 credit score going delinquent where someone [with a score based on alternative data] will pay on time. They had simply never had a chance before.
Kelly Cochran, deputy director of FinRegLab, a nonprofit financial organization, says “the pandemic and the focus on racial justice have heightened awareness of the issue of access to credit,” and its importance to closing the racial wealth gap.
Big players in the US financial system are finally mobilizing to ensure that minority borrowers get better access to credit, while protecting institutions’ risk by ensuring that loans go to those most likely to repay.