Who Are The Credit Invisibles?

Take a second and think about the last time you applied for a loan?   There was an application and multiple disclosures and then the waiting period for approval while a bank reviewed your income and payment history and creditworthiness. At the end of the day, we all know that a key piece of the underwriting puzzle was your credit score.   We see commercials every day telling us to order our free credit report, track our credit score changes, or even increase our credit score to get a free ottoman.   But what if you don’t have a credit score?   What if you’re credit invisible?

A recent CFPB study found that nearly 189 million Americans have a credit score. But in the same study published May 2015, the CFPB also uncovered that 26 million Americans are credit invisible, roughly 10% of the population.   What that means is that those 26 million people don’t have a credit score.   In addition, another 19 million Americans are credit unscorable, meaning they either don’t have enough credit history to generate a score (9.9 million) or their credit history is too stale to create a score (9.6 million).  In total, that’s 45 million people struggling with credit.  And remember, these individuals don’t represent bad credit – they’re not bankrupt or delinquent.

I know what you’re thinking – “okay…let’s concentrate on the 189 million people with credit.”  That seems to make sense.  But let’s look a bit deeper into whom comprises these 45 million people. 30% of the credit invisibles and 15% of the credit unscorables live in low-income neighborhoods.   Black and Hispanic individuals are also more likely to be invisible (13% of the population) or have unscorable credit histories (12% of the population).   The demographic differences start early in life and continue throughout adulthood in these populations, contributing to an ongoing cycle of lack of access to credit.

So what does this mean for CRA?   Considering that each bank is examined on their ability to lend in low-income areas, the fact that nearly half of low-income individuals don’t fit into a traditional credit underwriting process can, at best, present challenges and at worst, restrict credit. Add to that the Black and Hispanic applicants who face the same credit score dilemmas, and suddenly disparate impact and lack of assistance claims start to materialize during fair lending conversations.

A different approach is needed.

1. Embracing the tenants of CRA, banks need to provide loans to low-income neighborhoods by offering innovative products with flexible underwriting.
2. Banks need to consider non-traditional underwriting that evaluates more than just credit scores.
3. At the same time, the effort to increase financial literacy must be championed, educating credit invisibles and unscorables not only on the importance of credit reports but how to effectively manage credit and increase their overall score.   The ABA recently offered a quick guide that provides six ways to improve an individual’s credit score.

The fact that every community has underserved and unbaked populations isn’t surprising. What the CFPB has clearly illustrated is that if a bank’s answer is to roll out its existing products and underwriting standards into low-income neighborhoods, it’s likely to fail to meet credit needs from the outset.  Rethinking the system of providing credit is critical for success.