Jul 27, 2017 Philip Burgess
The use of alternative credit scores can significantly increase the number of people considered eligible for credit. This means leveraging alternative credit scores not only helps individuals, but it also ensures banks and other lenders can continue to seek out new lending opportunities.
One of the main reasons consumers aren't eligible for credit arises from their credit histories being too thin or stale. Due to this, many people simply don't have a credit score. In fact, the number of people without this crucial three-digit figure is growing. A 2015 report by the Consumer Financial Protection Bureau revealed an estimated 45 million people, or nearly 10 percent of the population, were listed as either credit invisible or have unscorable credit files.
The report noted that roughly 19 million people have unscorable files, and there are two reasons why a credit history might fall under this umbrella:
- Insufficient data - The record either contains accounts that are too new or has too few accounts to reliably calculate an accurate score.
- Stale data - The information is too old and there isn't any recently reported activity.
Although different credit-scoring models have varying thresholds for what they constitute as "insufficient" or "stale," the fact remains that a lack of data or old data simply won't be enough to determine a credit score. The CFPB noted that those without enough credit history due to these reasons were about evenly split, with 9.9 million people having insufficient data and 9.6 million lacking recent credit histories.
"About 26 million people are deemed credit invisible."
However, the larger chunk of individuals without scores were deemed "credit invisible" with about 26 million people falling under this category. These consumers have no credit history whatsoever with any of the major nationwide reporting agencies.
The challenges of credit invisibles
Without having this important three-digit number attached to their name, people who are credit invisible or have unscorable files will find it extremely difficult, if not impossible, to get credit or take out loans. This hinders them from purchasing a new car, getting a home mortgage or even obtaining a store credit card from a local retailer. All told, having either a thin or a stale file makes it extraordinarily tough for these individuals to access even the most basic necessities of life.
Using alternative credit scores
Just because an individual might be credit invisible or have an unscorable file, it doesn't mean the person just appeared out of thin air without any prior payment habits. Fortunately, there are other ways that lenders, retailers or other commercial organizations can ascertain whether these individuals have a reputable past of paying bills.
Microbilt's Alternative Credit Reporting allows businesses to evaluate the relative risk, credit worthiness and repayment capacity of credit invisibles. This alternative credit report gathers information concerning recurring bills such as rent, utilities and mobile phone account histories, which are not typically collected in a regular credit report.
With more robust data at their fingertips in an alternative credit report, businesses and lenders can make more informed decisions on credit invisibles.