Millions of Americans are locked out of low-cost credit markets simply because they don’t have credit scores. That’s millions of consumers who can’t qualify for a loan even when they have the ability to repay it. Experian, a major credit reporting agency, estimates that 66 million Americans are unscoreable—they do not have enough credit history to generate a credit score. And without a credit score, they can’t get loans to buy cars, start businesses, get mortgages, rent apartments, or even get jobs.
Current credit scoring models severely restrict the financial potential of millions of people, hampering the overall growth potential of our economy. This is a big problem. But it’s one we can solve by expanding credit scoring models to include additional data about people’s financial lives. By doing just that—including rent payments, utility payments and social loan payments—millions of the unscoreable would qualify for housing, jobs and affordable loans.
The VantageScore is an example of an inclusive credit scoring model that takes a fuller picture of people’s financial lives by accounting for rental payments, for example. This is not an insignificant segment of the American population—38.7 million households pay rent every month.
PERC, a research and advocacy organization, estimates that 60 percent of unscoreable consumers could have a score by including positive utility and telecommunications payments. Yet these industries continue to report exclusively negative payment information.
A more inclusive score is not just the “right” thing to do; there is also tremendous potential to help fix our economy.
The implications of doing nothing—of keeping to the status quo—condemns millions of Americans to the economic margins where they can only do business with high-cost, predatory lenders. The Pew Center recently found that each year 12 million Americans turn to payday lenders for small, short-term loans and end up paying $7.5 billion in fees and charges. If these families could instead access low-cost credit—if they could keep a fraction of what they hand over to payday lenders—they would have more money to pay for rent, buy food, save for emergencies, or even invest. This could be so if credit scoring models reflect what’s actually happening in people’s financial lives.
I am fortunate to lead a small non-profit organization in San Francisco that is dedicated to helping financially excluded communities, particularly low income and immigrant families, become visible, active and successful actors in our financial marketplace. Through social loans, we take folks at the margins of society on an “express train” into the financial mainstream.
We’ve seen the transformative power of credit scores in the lives of single mothers struggling to qualify for an apartment and food caterers who can’t access bank loans. With an inclusive credit scoring model, we could unleash this same power for millions of Americans.
This post was written by José Quiñonez (@MAFpajarito), the executive director at Mission Asset Fund. José was elected into the Ashoka Fellowship in 2012.
