‘Credit Invisibility’ Blocks Would-Be Car Buyers

Transportation is a key factor in upward mobility in the U.S. In many parts of the country, it is nearly impossible to work without a vehicle. However, in order to buy a vehicle, one must have credit.

There are 26 million Americans who are “credit invisible,” or who do not have a credit file with any of the traditional credit reporting agencies (CRAs): Equifax, Experian and Trans Union.

And 8% of U.S. consumers have “unscored credit records, which means they have insufficient credit history to generate a credit score.

CRAs use tradeline data to score consumers. This includes information about the account, the type of account and payment information.

It is essential for accurately evaluating and predicting a consumer’s future behavior, but it does not capture a holistic view of a consumer’s overall financial standing.

Although traditional CRAs use alternative data for scoring, this data only includes public records information, such as court records from bankruptcies and liens or judgments.

The majority of underbanked consumers, the “credit invisible,” are not adequately scored through traditional CRAs. The missing link is that they don’t have pertinent information from alternative lenders, which many underbanked consumers use for access to loans because they don’t have a mortgage or credit card.

Many of these alternative lenders report data only to alternative CRAs. Without data from alternative CRAs, traditional lenders miss out on serving a much wider consumer base. Consumers often miss out on obtaining an auto loan and gaining a higher credit standing.

Lenders who integrate credit tradeline data from alternative lenders can offer consumers more flexibly priced loans, while at the same time mitigate losses. Alternative credit tradeline data helps lenders capture the highest-risk consumers in lower score bands, while promoting the lowest-risk consumers into higher score bands. This allows lenders who work with consumers who would have identical profiles within the CRAs to be assessed for risk more accurately.

Traditional CRAs use traditional tradeline data, but alternative CRAs provide performance, verification public-record data. That helps lenders more accurately score risks and predict ability to repay.

Included in performance data reported by alternative CRAs are alternative tradeline data, utility or telecommunications data and apartment rental records. Included in verification and public records data is information about bankruptcies, liens, judgments and banking relationships and account performance.

This information is imperative to better understanding the risk associated with lending to underbanked consumers and essential to enabling these consumers to build their credit history.

Many consumers who were on or above the prime line moved below the line as credit underwriting requirements for traditional lenders tightened during and after the 2008-2009 financial crisis.

Alternative lending gained ground, and out of a need for faster and more accurate background information on consumers, so did alternative credit reporting agencies. These agencies provide data in real-time, and the quality and consistency of the data has continually improved as lender contributors realize the benefits of providing accurate alternative credit data.

Alternative credit data not only provides lenders with a more holistic view of borrowers, but it also helps many consumers improve their credit and overall economic status. 

Greg Rable is chairman and CEO of FactorTrust, an alternative-credit reporting agency. He has more than 20 years of experience in financial services, electronic payments, credit-risk data and related technology.