Banking

Alternative credit metrics work. Lenders should embrace them.

Recent U.S. economic news is a head turner. One moment we’re looking at robust Q1 GDP growth and a 14-month high in consumer confidence, and the next we see that prices are surging. Disappointing job growth is quickly followed by a new jobless claims low. There’s hopeful talk of a “reopening boom,” but it’s tempered with renewed fears of inflation.

What does it mean for the average person who simply wants to manage their finances and get on with life?

It’s true that many Americans have been saving more over the past year and paying off debt. More are committed to saving and to focusing diligently on their finances. Looking ahead, our research shows that they plan to increase spending in areas like travel and entertainment.

But among consumers who are in the market for credit — which is to say, anyone needing some extra money to meet their personal goals — virtually all (96%) say that the pandemic has negatively affected their household income.

The hardest-hit consumers remain those with little to no credit history. For one, they lack the resources to improve their financial health. Worse yet, they have fewer ways to do it compared with other consumers.

Every consumer deserves access to fair and affordable credit, and the financial education to help them along the way. As an industry, we need to continue to take strides to facilitate that access, otherwise economic mobility will remain out of reach for millions of Americans. The lack of access to financial resources will only contribute more to the widening of the equity gap and make underserved communities more vulnerable.

What’s needed is a more inclusive approach to financial health and, related to that, smarter use of data to develop a more complete picture of a consumer’s financial situation.

Organizations dedicated to expanding economic opportunity in underserved communities show what’s possible. One we partner with is Operation HOPE, where I am honored to serve as a member of the advisory board. Through its work, Operation HOPE has demonstrated that when people without a bank account are suddenly able to open one, financial insecurity is replaced with financial resilience. Renters become buyers. Dreams become businesses.

Broader partnerships with such organizations could deliver tools and resources to uplift and educate consumers. Equipping consumers with credit management best practices, and helping them understand the credit scoring process, puts people across the country in a position to improve their financial health. Our own research affirms the value of promoting financial literacy; over the long run, the majority of consumers enrolled in a credit education program see their credit scores improve; consumers with lower scores often benefit the most.

But it doesn’t stop at credit education. Offering lenders a more complete view of an applicant’s financial situation is another way to provide consumers with more equitable access to financial opportunity.

Lenders tend to look at auto loans, bank cards, and mortgage payments when extending credit — but what if you don’t own a house or a car? You could be among the tens of millions of consumers who diligently pay their rent, utilities, and other bills every month, yet have no credit history. The key here is data; these data points should be incorporated into a consumer’s credit history. Doing so can provide a holistic view of an individual’s ability to repay a loan, it’s a far more inclusive approach, it’s still compliant with the Fair Credit Reporting Act (FCRA), and it can assure lenders that so-called “credit invisibles” and “thin-file” consumers can easily meet eligibility requirements.

Using rental, utilities and telecom payment data is valuable, and we know through our own work helping individuals with their financial goals that this is something lenders are open to. Nine of ten lenders (89%) believe this additional credit data allows them to extend credit to more consumers. By empowering lenders with more data and advanced analytics, they can continue to lend and manage risk responsibly so that more consumers have fair access to affordable credit.

We’re all ready for a reopening boom. But until we open credit access to all, and enable all consumers to improve their financial health, our economy will never be as strong, stable, or as equitable as it should be. Working together, leaders in the financial services industry can make it happen.



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