Millions could get a leg up financially if credit scores included alternative data

Almost 50 million Americans could finally earn a credit score — opening up financial opportunities — if their credit histories incorporated alternative data, such as rental payments, utilities, and trended data, according to a new study.

As a result, these individuals — who are disproportionately young, Black, and Hispanic — could have an easier time qualifying for credit cards, borrowing to start a business, or getting a mortgage to buy a house.

“To drive financial inclusion, the industry must adopt expanded data and advanced analytics,” Greg Wright, executive vice president and chief product officer for Experian’s consumer information services, told Yahoo Money. "Doing so can help many people who are currently excluded from the mainstream credit ecosystem gain access.”

About 28 million Americans lack credit history (called credit invisible) and another 21 million don’t have sufficient information to generate a mainstream credit score, according to the report from Experian. Of those, 26% were Hispanic and 28% were Black consumers, compared with only 16% of white and Asian consumers. About 2 in 5 were under 25, the report also found.

Adding alternative data to credit reports could help 50 million Americans obtain a mainstream credit score, according to one study.
Adding alternative data to credit reports could help 50 million Americans obtain a mainstream credit score, according to one study. (Credit: Getty Creative) (alexsl via Getty Images)

‘The ways of using money have changed’

One of the first ways adults traditionally build credit is buying a car with a loan, according to Dara Duguay, chief executive officer of Credit Builders Alliance (CBA), a nonprofit organization. But that doesn’t apply to many young people who live in cities and depend on other modes of transportation or car-sharing programs.


“The ways of using money have changed, particularly with young people,” Duguay said. “Now younger people are having a harder time building credit which puts them at a disadvantage further down the line.”

Black and Hispanic Americans are also at a disadvantage.

Compared with whites, Black individuals are 1.8 times more likely to be credit invisible or unable to be scored. Even when scored, they are 1.9 times less likely to have access to prime or near-prime rates, according to the analysis.

Similarly, 16% of Hispanics were credit invisibles, compared to 9% of whites. When scored, only 29% of Hispanic individuals reached prime rates. By contrast, 62% of Asians and 51% of the white population obtained prime rates.

“Low-income consumers or those without credit are often subject to high interest rates for car loans, credit cards, and personal loans which perpetuates a historic disadvantage,” Duguay said.

(Credit: Experian and Oliver Wyman)
(Credit: Experian and Oliver Wyman, Financial Inclusion and Access to Credit) (Credit: Experian and Oliver Wyman))

To help these Americans build credit, adding new information that’s not traditionally found in credit reports could be key, according to the report.

One is rent-reporting.

“On average, rent reporting has helped tenants that were once underscored or didn’t have a credit history obtain a credit score within six months,” Duguay said, noting that the CBA partnered with affordable housing providers for over five years to help them report rental payments to the main credit bureaus. “It also helps build credit without taking on more debt.”

Adding other common accounts like cell phone, utility, and video streaming services is another game-changing tool for consumers getting started with building their credit, says Wright.

Experian Boost, for example, is a free tool that allows consumers to add their on-time utility, streaming services, and telecom payments to their Experian credit report to boos their credit scores. Notably, Experian Boost only counts positive payment history, so late payments will not negatively impact credit scores.

Trended data is another way to increase the scored population. Unlike a credit report that shows a person's credit in a moment in time, trended data helps identify whether a consumer's payment pattern is improving or deteriorating based on their recent history.

According to the report, trended data can help around 19 million Americans obtain credit, including 6 million Blacks and Hispanics. While most would be considered subprime, at least 2 million that were near-prime could reach mainstream rates.

“The old way of doing things,” Wright said, “the old tools will not work to ensure more consumers can access fair and affordable credit.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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