By Hannah Flanders
Throughout the United States, millions of Americans are left out of mainstream financial services due to their credit score, or lack thereof. As financial inclusion — with particular emphasis on providing the underbanked access, expanding opportunities for all, and eliminating barriers — becomes increasingly critical in ensuring every consumer has the possibility to gain wealth, it is equally as important that banks understand the unique challenges these individuals face and how they can best be served.
What Does it Mean to be Credit Invisible?
According to information compiled by Oliver Wyman based on data by Experian and previous Consumer Financial Protection Bureau (CFPB) research, around 28 million American adults are credit invisible. Additionally, 21 million adults in the U.S. are considered unscorable. Defined as one’s lack of credit history and score, credit invisibility often results in difficulty accessing credit products. Unscorability, on the other hand, defines the limited information one has in their mainstream credit file and therefore their lack of ability to generate a conventional credit score.
The CFPB highlights that not only are a disproportional number of credit invisible customers located in low-income neighborhoods, but that around 15% of Black and Hispanic consumers are credit invisible in comparison to only around 9% of white customers.
However, as 90% of the top lenders throughout the U.S. require at least six months of recorded credit activity, according to the credit bureau Experian, credit invisible consumers often do not have access to reliable means to establish and expand their credit.
With minimum balance requirements and fees being cited within the top five reasons as to why 4.5% of households in the U.S. remain unbanked, according to the Federal Deposit Insurance Corporation’s (FDIC) 2021 FDIC National Survey of Unbanked and Under-banked Households report, it is critical that bankers find alternative solutions for those looking to expand their opportunities, meet their financial goals, own a home, or simply begin their financial journey.
Providing Accessible Credit
Lack of access to mainstream financial services or other low-cost credit products often does not stop individuals from borrowing or seeking certain forms of financial assistance. In fact, this may inadvertently cause one to engage in high-cost, potentially predatory lending cycles.
“Banks throughout America play an important role in not only providing opportunities for consumers to access traditional credit services, but also in assisting individuals to establish and maintain their credit,” says Jeff Langkamp, vice president — chief compliance officer at Bank Five Nine in Oconomowoc. “Having no credit score most likely means that individuals will have to pay a higher interest rate or use payday lenders who charge outrageously high interest rates. Additionally, establishing a credit score to purchase a house or car allows families to build generational wealth.”
To bankers, providing access to credit may mean offering secured credit cards or developing a credit invisible loan program, which involves making smaller loans to invisibles to gradually build their scores or looking beyond the standard evaluation producers to aspects such as their residency and employment stability.
At Bank Five Nine, customers have access to the Achieve Credit Builder™ program, an account certified as meeting the Bank On National Account Standards. The product, according to Langkamp, helps individuals establish or repair their credit at little to no cost.
“The average age of our customers that are taking part in the credit builder program is 26, so the product is helping younger individuals as they begin their credit journey,” highlights Langkamp.
Positioning Consumers for Success
In December 2022, Fannie Mae announced that it would be strengthening its underwriting program Desktop Underwriter® to responsibly expand eligibility and further simplify the borrowing process for individuals without credit scores.
“Traditional lending practices make it hard for borrowers with no credit score to access credit,” said Malloy Evans, executive vice president and head of single-family business, in the press release published on December 6.“[As a result,] Fannie Mae has taken steps that may help them responsibly qualify for a home loan using data that provides a more holistic view of how they manage their money.”
The enhancements released by Fannie Mae update existing eligibility criteria to permit standard loan-to-value (LTV), combined loan-to-value (CLTV), and high credit loan-to-value (HCLTV) ratios on certain properties and expand the standard maximum allowable debt-to-income ratio to 50%. Additionally, the organization has created an automated option for documenting nontraditional credit sources to simplify the process for both the lender and the borrower.
A significant component of this update also includes allowing borrower-permissioned data that consider a borrower’s transaction patterns and balance trends.
Embracing Alternative Credit Data
As many banks and businesses across the U.S. look to alternative ways to promote financial capability among all consumers, many are looking to consumer-permissioned data. Experian defines alternative credit as expanded Fair Credit Reporting Act (FCRA)-regulated data. This data often includes rental payments, small-dollar loans, and other consumer-permissioned data.
“Each individual situation is different; the most important thing is finding a plan that fits the needs and financial goals of the individual,” emphasizes Langkamp. “In addition to resources like Achieve Credit Builder™, our bank encourages our customers to take advantage of self-reporting opportunities like rental housing, and other payments that may not be reflected on a credit report.”
As establishing good credit remains a critical component of one’s ability to acquire wealth, self-reporting has quickly become an integral aspect in assisting individuals to easily establish a credit score.
In an effort to make credit accessible to all communities, Experian has developed free resources for consumers to utilize as they develop their credit score. Experian Go™ provides individuals with education and insights unique to their credit journey. Experian Boost™ allows consumers to connect their bank account or credit card to their Experian credit file. By making on-time payments, individuals can highlight their good spending habits and raise their credit score.
“By using expanded data sources and better analytics in credit decisions, banks can help more consumers gain access to credit while making more informed decisions,” says Greg Wright, executive vice president and chief product officer for Experian Consumer Information Services. “This is a win for both lenders and consumers — and it’s just the right thing to do.”
Wright adds that score models used today have historically left nearly 50 million Americans living with a limited credit history locked out of the credit ecosystem. “Leveraging expanded data sources and advanced analytics can help change this narrative,” he emphasizes.
While credit invisible and unscorable individuals remain a significant portion of our communities, there are many opportunities for banks to assist. Whether it be offering low-cost products and secured credit cards or encouraging consumers to utilize resources that educate them on their individual credit journey, bankers play a major role in promoting financial security for generations to come.
“This is an exciting time for the banking and financial services industry,” concludes Wright. “By leveraging the right tools, we are nearing a point where we can say — no matter who you are, where you live, or what part of your financial journey you’re on — that we can score you and help you access the financial services you need.”