About one in 10 American adults have no credit history according to a report from the Consumer Financial Protection Bureau, a total of 26 million persons who are "credit invisible." These are persons who have no information on file with any of the nationwide consumer reporting agencies.
Credit histories contain data on a consumers bank loans, car loans, credit card bills, student loans, and mortgages; details about the terms of credit, totals owed, payment histories, and any liens or judgments that may have been incurred. This information is used by the agencies to produce three digit credit scores. Most decisions to grant credit and set interest rates for loans are made based on information contained in credit reports and on the resulting credit scores. As a result, those consumers who have a limited or nonexistent credit history face greater hurdles in getting credit.
CFPB says that in broad terms, those with limited credit histories can be classified as either consumers without a credit report, the "credit invisibles," or as a second group, the "unscored." These are consumers who do not have enough credit history to generate a credit score or who have credit reports that contain "stale" or not recently reported information. CFPB estimates that 19 million consumers have unscored credit records, about half of which are considered unable to be scored, a definition that differs across scoring models, and half that lack up-to-date information.
Fair Isaac Corporation which produces the widely used FICO credit score places the number of unscored Americans at 53 million, slightly higher than CFPB's total of those either lacking any history or with histories that cannot be scored. CFPB says that about 189 million Americans have credit records sufficient for scoring.
The Bureau finds that Black and Hispanic consumers and those in low-income neighborhoods are more likely to lack any file with a nationwide reporting bureau or insufficient history to generate a credit score. Of the consumers living in low-income neighborhoods, almost 30 percent are credit invisible and an additional 15 percent have records that are unscored. In contrast, in upper-income neighborhoods, only 4 percent of the population is credit invisible and another 5 percent have records that cannot be scored under the widely-used model.
About 15 percent of Black and Hispanic consumers are credit invisibles compared to 9 percent of White consumers. An additional 13 percent of Black consumers and 12 percent of Hispanic consumers have records that can't be scores compared to 7 percent of White consumers. CFPB analysis suggests that these differences across racial and ethnic groups materialize early in the adult lives of these consumers and persist thereafter.
CRPB Director Richard Cordray said "Credit reports and credit scores can determine the terms of people's mortgages, whether they qualify for auto loans, or if they are eligible for different credit cards. As long as they follow the requirements in the law, potential employers may review a consumer's credit report as a factor in making a hiring decision. Landlords may also consider this information before deciding whether to approve a potential renter or how much money to require for a security deposit.
"So when consumers do not have a credit report, or have too little information to have a credit score, the impact on their lives can be profound. It can preclude them from accessing credit and taking advantage of certain opportunities. And given that we found that consumers in low-income neighborhoods are more likely to be credit invisible or unscored, this may be limiting opportunities for some of the most economically vulnerable consumers."
A pilot program currently underway by Equifax, Lexis/Nexis Risk Solutions, and FICO may address some of the problems noted by the Bureau. Twelve of the largest credit card issuers are using alternative data to identify creditworthy individuals who would not otherwise be candidates for traditional credit. The new scoring model uses information on payment histories with utility and telecom companies to help under-banked and disadvantaged people gain credit access.
FICO estimates that the new model will allow scoring an additional 15 million consumers. The companies will complete the pilot program shortly and expect to make the alternative model available to more lenders later this year. Based on statements made by FICO at a credit scoring summit hosted by the National Association of Realtors in early April, we expect those other lenders to include those in the mortgage industry.