No Credit History? New Scoring Method for the Underserved
Credit scores have played an increasingly vital role in the lives of U.S. consumers. They aren’t just used in order to determine if someone is credit-worthy, but also the price that they can obtain credit. In addition, credit scores can influence someone’s ability to rent an apartment, the price of their insurance and even affect the hiring decisions of future employers. Unfortunately, there are millions of people who do not have any credit history, or only very little credit history or have a terrible credit history that prevents them from many financial services. This is changing in recent days, as there has been a search for an alternative to the traditional FICO score for the 20% of the U.S. population who do not have any credit. Between 50 and 80 million people only have limited access to capital and credit due to the fact that they have non-existent or thin credit history, and so this new credit score may help them tremendously.
The Difficulty of Not Having Credit
Without having a credit history or score, lenders are forced to process a credit application in the old fashioned way, which is extremely time consuming and expensive. Every application must have various documents like copies of utilities and rent payments, as well as employment history verification. Even if someone with no or little credit has their application approved, they usually must pay a much higher interest rate due to the fact that lenders consider them more of a credit risk.
Alternative FICO Score
The Federal Trade Commission is investigating as to whether or not there are any common financial transactions that aren’t typically reported on credit histories that could actually give useful information to the main consumer reporting agencies in regards to determining a person’s credit rating. They’ve concluded that peoples’ utility payment history could provide useful data. The alternative FICO score idea is that those vendors who are doing business that involves recurring payments may help supply the payment history in order to fill in the files that are thin or non-existent so that they can become viable credit histories.
Credit Files Will be Balanced
Many advocates think of this strategy as a means of balancing out someone’s credit file with a positive payment history that will build someone’s thin credit history, as well as take some of the weight off of negative credit data. For instance, a utility company typically won’t report an entire payment history to credit bureaus, however they will refer any collection issues to agencies who will report all of the negative information. This means that when a utility customer that doesn’t pay his or her bill possesses very little credit and is referred to a collection agency then the customer’s credit report will contain their nonpayment from that collection company. However, it will not be balanced by the person’s positive history of making payments. By balancing negative data with a positive payment history creditors can gain a more accurate idea of a person’s capacity to take on credit, and improve their basis for estimating credit risk.
Opportunity Given By Alternative Credit Score
Allowing for alternative data sources to be used in order to created an expanded score will offer a great opportunity for smaller businesses to focus more of their attention on the segment of the market that is underserved. This market is emerging as a great economic driver for credit data alternatives due to both their size and cultural characteristics. The credit market that is underserved largely consists of a growing Asian and Hispanic immigrant population, as well as long established communities of senior citizens and other cultures. It also includes those who are just entering into the work force, and those who are newly divorced. Allowing for alternative data to be used in credit sores will aid lenders in removing the guesswork of working with the population who is credit underserved.