The race to hand out credit scores
Credit bureaus want to score more Americans, by incorporating non-credit sources — timely rent payments, for instance — into their calculations.
Why it matters: A lot of for-profit companies have joined the bureaus in this space, invariably proclaiming high-minded ideals of financial inclusion. But as Stanford sociologist Barbara Kiviat tells Axios, "access to credit is the same thing as enabling people to become indebted."
How it works: Lenders like to lend to people they can trust to repay them in full and on time. One way of predicting such behavior is to look at how assiduously previous loans have been repaid. Another way is to look at a history of on-time payments for anything from rent to utilities to Netflix.
- One such program, Experian Boost, has signed up 8.6 million Americans. In the same vein, Esusu, which works with landlords, claims a 100% success rate in getting a credit score for people who previously didn't have one.
- Other credit-building companies, like TomoCredit and X1, make short-term loans underwritten against wealth or income rather than repayment history. Those loans then build a credit history, which becomes a credit score.
By the numbers: Compared to someone with "very good" credit of between 740 and 799, someone with "fair" credit — between 630 and 689 — has to pay substantially more interest on their loans. The credit risk means higher rates of about half a point on mortgages, three points on auto loans, and seven points on credit cards.
The catch: If a "credit invisible" person then ends up with a credit score that's very low, that can be worse than having no credit score at all, says Chi Chi Wu of the National Consumer Law Center.
- Having bad credit can double your car insurance rate — but in most states that allow insurers to use credit scores, the law specifically says that people without a credit score can't be penalized.
- Similarly, having bad credit is worse than having no credit when you're applying for a job.
- Having a subprime credit score also exposes people to some of the most predatory lenders in the industry.
The other side: "I have yet to see anyone go from credit invisible to a bad score," says Maitri Johnson, who oversees programs at TransUnion that incorporate rent payments into credit scores.
The big picture: All of these programs, so far, are opt-in. People who pay their rent on time are the people who try to improve their credit scores, or get a brand-new score that's reasonably healthy. People who don't, generally don't.
- The risk is that as these programs become embedded into credit bureaus' methodology, data on things like rent and utility payments will be automatically reported, much like data on loan repayments are today.
- At that point, the programs "may replicate and entrench the social and economic disadvantages that lead some people to have fair and poor credit scores," write law professors Pamela Foohey and Sara Sternberg Greene in a recent article.