The Impact of Reporting Everyday Expenses on Credit Scores

For years, consumers with thin or no credit files have been excluded by lenders and the traditional credit scoring system. Being credit invisible or unscorable does not necessarily mean that you are financially irresponsible. Other than lines of credit, many consumers regularly pay their bills on time; take utility bills, for example. According to an Urjanet survey, 91 percent of U.S. adult consumers have at least one household utility in their name.

There’s a strong correlation between a consumer’s payment behavior as it pertains to utilities, rent, and phone payments and their ability and willingness to repay loans and credit cards. Unfortunately, under traditional standards, these payments aren’t reported to credit bureaus unless they are delinquent for an extended period. Reporting everyday expenses can impact the 91 million consumers across the U.S. who have been shut out by current credit reporting standards.

Whether they’re immigrants, millennials, or residents of low-income areas, these individuals with thin credit files or no scores are regularly denied lines of credit, subjected to predatory rates from non-traditional sources, and don’t have access to favorable borrowing terms because they’ve yet to establish a sufficient credit history.

Credit invisibles also face exclusion from banks’ marketing efforts because of the assumptive credit risks associated with lending to them. While they may not have a traditional credit history, some of these consumers are financially responsible, make consistent, on-time payments for everyday expenses, and are ideal prospective customers for lenders.

The status quo is changing

Alternative data and the inclusion of everyday expenses steps in where traditional credit scoring falls short. When using conventional data to evaluate creditworthiness, the three major credit bureaus consider a consumer’s:

• Ability to repay debts
• Credit utilization
• Revolving credit
• Age of credit accounts

Not only do these criteria shut out millions of people whom financial institutions deem to be high-risk, but they also don’t take into consideration banking trends. The spending habits of millennials have changed; 27 percent prefer to use debit cards for purchases, while 26 percent prefer credit cards. As younger demographics spend less and less via credit cards, their chances to enrich their credit files get smaller and smaller.

The impact of reporting everyday expenses

Reporting everyday expenses for consumer credit has a positive impact on both borrowers and lenders. New doors open up for consumers to achieve financial freedom. They’re not only improving their eligibility for lines of credit but also getting more favorable borrowing terms on those credit lines.

For lenders, combining traditional and alternative data gives them a better overview of a borrower’s profile. It can improve credit decisions, increase approval ratings, improve customer relationships, and generate more business by tapping into a previously excluded market.

FICO, a credit score modeling company, conducted research to demonstrate that alternative data sources do add predictive value to models based on traditional data. When combining traditional data characteristics with characteristics from multiple alternative data sources, a more powerful credit model was produced.

Financial services companies, including eCredable, LevelCredit, and RentalKharma, are continuing to push the boundaries of alternative data reporting. These companies report rent and/or utility payment data to nationwide credit bureaus to help those with thin/no credit files improve their credit standing.

Bring alternative sources into the mainstream

There are five federal agencies that agree that alternative data can be beneficial to the underwriting process. These agencies  “recognize that use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system.”

Five federal agencies recognize that use of alternative data may improve the speed and accuracy of credit decisions.

Reporting everyday expenses is a move that can impact roughly 5.5 million U.S. consumers who are currently considered unscorable. People who are credit invisible can finally be recognized for their positive payment histories and emerge from the shadows into the mainstream financial system.

Interested in learning how your company can help empower more consumers? Speak with an expert today about our utility payment data solution for credit risk assessment.

 

You might also be interested in:

• Blog: The Economic Impacts of Alternative Data on Financial Inclusion
• Blog: Data Showdown: How Do Alternative Data Sources Compare
• eBook: Building a Risk Model with Utility Payment Data

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