As reported earlier by GoodCredit.com, the federal Consumer Financial Protection Bureau (CFPB) estimates that approximately 26 million adults in the United States don’t have good credit because they have no credit records. This demographic is commonly referred to as the “credit invisibles.” An additional 19 million have such limited credit records as to be “unscorable” by the three major national credit reporting agencies (Experian, Equifax and TransUnion), due to either insufficient credit history or lack of recently reported credit activity. Roughly one in five American adults fall into these groups, while all other adults have enough recently used credit accounts to generate a credit score under the models used by the agencies (i.e., FICO or VantageScore). Those having a credit score, in turn, can be determined by lenders to have good credit, bad credit or something in between.
The traditional remedies for borrowers with no or limited credit histories include methods such as obtaining a secured credit card (pledging cash as collateral against the account) or having someone with good credit co-sign a loan. These borrowers can then make timely payments on these accounts to eventually establish good credit entitling them to more favorable loan terms.
New credit scoring models now loom on the horizon which might allow the credit invisibles and unscorables to build a credit history based on their bill-paying history of non-credit accounts. Fair Isaac Corporation, developer of the FICO score, hopes to unveil a plan by the end of the year to judge a potential borrower based on timeliness of paying accounts such as cable television, internet service provider, cell phone and utility bills. Other factors such as address stability would also be taken into consideration.
Although a previous similar attempt by Fair Isaac at developing an alternative scoring method failed, it was distributed by smaller credit-reporting agencies several years ago during the recent credit crisis when lenders quickly became more risk averse. The new Fair Isaac method, however, has the support of heavyweight Equifax and is being tested by about a dozen credit card companies, which should make success much more likely.
A further indication of growing demand for an expanding borrower base is that VantageScore has recently indicated it has the capability to score the unscorables by checking further back in time in their credit histories.
For more information about building good credit, we invite you to look at the articles in the GoodCredit.com Learning Center.