The Consumer Financial Protection Bureau (CFPB) recently released a report, Data Point: Credit Invisibles, concluding that 45 million Americans do not have credit histories or have credit histories that are too sparse to generate a credit score. The report explained that consumers without a credit record or a record with insufficient information to assess creditworthiness "face substantially reduced access to credit." The report also reveals the demographic characteristics of consumers with limited credit histories. This new information may inform efforts to provide such consumers with better access to credit markets.
The report divided consumers with limited credit histories into two groups, the "credit invisibles" and the "unscored." The "credit invisibles" do not have credit records and represent 11% of the U.S. adult population, or 26 million individuals. The "unscored" have credit records, but the records are "unscorable," either because they contain insufficient information to provide a score or the available information has become "stale" in that it contains no recently reported activity. Another 19.4 million individuals, or 8.3% of adults, comprise this group.
The report calculated the incidence of being credit invisible or having an unscored credit record across three demographic characteristics: income, race or ethnicity, and age. In particular, the report concluded that:
- There is a robust relationship between income and having a scored credit record. Almost 30% of consumers in low-income neighborhoods are credit invisible and an additional 15% have unscored credit records.
- Black and Hispanic consumers are more likely than White or Asian consumers to be credit invisible or have unscored credit records.
- Most consumers that are credit invisible or that have an unscored credit record are young. For example, over 10 million of the estimated 26 million credit invisibles are younger than 25.
The CFPB explained that three nationwide consumer reporting agencies generate the credit reports that track a consumer's credit history. These reports reflect information about how the consumer repays his or her debt. The credit invisibles and consumers with unscored records face greater obstacles in obtaining credit because lenders often use credit reports to decide whether to approve a loan application or when setting a loan's interest rate.
There have been proposals for increasing access to credit markets for consumers with limited credit histories, including supplementing the information contained in credit reports with various types of "alternative data," such as utility and telecommunications payments, rental payments, and remittances. Additionally, the industry has developed scoring products particularly for this group of consumers. The report cites FICO's pilot project as one example. FICO recently announced that it is launching a project that extends the number of consumers whose records can be scored using alternative data.
Given the significant number of invisible and unscored consumers identified by the report, the report highlights the continued relevance of small dollar lending and the growing importance of credit decisioning for borrowers with thin files, based on alternative credit scoring models. The latter may require careful fair lending analysis, which should be balanced against the benefit of building credit for underserved borrowers.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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