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Do you have the right consumer reports to score credit invisibles?

Feb 09, 2017 Walt Wojciechowski

There are about 26 million credit invisible consumers throughout the U.S., according to a report from the Consumer Financial Protection Bureau. While these individuals represent an untapped market, engaging them in the lending process is difficult because loan officers, underwriters and others have no traditional credit data to reference in the approval process.

The absence of credit data doesn't leave enterprises with many options. How can they provide loans to credit invisible consumers without increasing overall risk to their operations?

Using the data that's available
While one in 10 U.S. adults may not have credit cards or outstanding loans, many of them likely do pay rent.

The CFPB's report noted the majority of credit invisibles consisted of people living in low-income neighborhoods, Blacks, Hispanics and young adults. A study from Trulia discovered older millennials and Hispanics rent more today than they did before the Great Recession, when they were more likely to own their own homes.

Rental payments represent a tenant's willingness to maintain a contractual agreement between himself and his landlord. To ensure he has a place to live, the tenant organizes his finances so that he can pay his monthly dues on time and in full. Given that the data suggests those who are more likely be credit invisible also rent at higher rates than those with traditional credit histories, enterprises may reference consumer rent payment histories to determine how diligently they stay on top of this fiduciary obligation.

The problem is, most traditional credit reports do not provide accurate rent payment information consistently. This is because landlords rarely, if ever, send credit bureaus monthly notifications citing their tenants' payment behavior.

Most millennials are credit invisible, but do pay rent, and have long alternative credit histories. Most millennials are credit invisible, but do pay rent, and have long alternative credit histories.

Finding consumer reports with rent and other alternative data
Rent payment information falls under the umbrella of "alternative credit data." This information consists of consumers' rent, utility, telecom and insurance payment histories, covering all of the expenses individuals handle on a monthly basis. Distinct types of consumer reports contain alternative data, enabling lending professionals to assess credit invisibles' ability to pay back loans.

Between millennials' unwillingness to own credit cards and consumers trending away from traditional lending products, many researchers have found alternative credit data to be a reliable reference for determining people's creditworthiness. A study from the Policy & Economic Research Council concluded that analyzing alternative data - specifically, rent payment information - is a dependable means of assessing unscored individuals' creditworthiness for the following reasons:

  • It consists of a larger share of one's income than utility and telecom bills.
  • Rental data covers people who may have thin-file or no-file credit history.

The manner in which alternative consumer reports collect rental data also differs from how credit bureaus gather information. Alternative credit agencies connect directly to consumer accounts, enabling them to collect rent payment data in real time. In addition, some providers offer these reports to consumers for free, so renters have an incentive to sign up for the service.

Businesses that hope to use traditional credit reports to assess credit invisible consumers will continuously fail to engage those individuals. The best option at their disposal is to use consumer reports that contain alternative data. However, lenders must also thoroughly assess alternative credit agencies' capabilities before procuring reports as some bureaus have more experience collecting rent, utility and telecom information.

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