With many of the younger generation beginning to avoid credit cards because of high interest rates and the potential for late payment fines, the creditworthiness of these consumers is becoming harder to judge.
Later in life when it comes to mortgages or car loans, it can be difficult for these credit-invisible people to obtain credit when they need to.
In America, the Consumer Financial Protection Bureau (CFPB), the government agency tasked with the sole mission of protecting consumers, has announced that it will be looking into alternate ways of determining consumers’ creditworthiness by asking the public for feedback about having alternative data for producing a credit score.
Since loans have ceased to be made on a personal basis and moved on to an algorithmic system that assigns a credit score, the CFPB found that as many as 25 million Americans have no credit history, with a further 19 million having extremely limited credit history.
‘These people often are caught in a Catch-22, unable to get credit because they have not had credit before,’ said CFPB Deputy Director Richard Cordray. ‘They cannot seize meaningful opportunities, such as borrowing to start a business or buy a house.’
Referring to other options, he continued: ‘We want to learn more about whether this kind of alternative data could open up greater access to credit for many Americans who are currently stranded outside the mainstream credit system.’
A similar idea was trialled in 2015 with a pilot program where credit card companies could use alternative data such as utility bill payments and public records to define the creditworthiness of consumers.
A new hybrid system may be considered that takes elements like those payments and combines it with traditional lending practices, which take into account the consumer’s lifestyle and personality.
‘Alternative data may draw from sources such as rent or utility payments,’ said Cordray. ‘It can encompass the kinds of information that relationship lenders typically know as a matter of course, such as the consumer’s occupation, educational attainment, and various other personal accomplishments.’
Whilst the idea is only at consultancy stage it is generally considered that something needs to be done to help those falling outside of the present credit scoring methods.
What happens in America usually spreads quickly to the UK, so the future of credit scoring could be about to change.