Credit 101

Who Doesn’t Have A Credit Score? (Hint: It Could Be You)

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For numerous reasons unrelated to their ability to pay back loans, millions of creditworthy borrowers find themselves unscoreable under traditional credit scoring models. Yet at the same time, lenders are seeking new pools of creditworthy borrowers.

With such a win-win proposition, it’s amazing we are still discussing how to solve this challenge.

A basic requirement for a credit score is some history of credit usage. Some credit score models require very recent credit usage, such as activity on at least one account at some point in the last six months. In other words, whether you have one credit account (e.g., a credit card) or many, if you don’t use any of them for six months, you may be invisible to many lenders because the credit score model they are using may not recognize your credit history.

By the same token, if you are new to the credit market (e.g., a recent college graduate and/or someone who acquired a secured credit card, which is a credit card that includes a deposit, without the use of a score) you cannot receive a credit score using some traditional models until after six months of reported payment history.

Having been an executive at large lending institutions for most of my career, I witnessed this scenario first-hand. A great many borrowers, whom I knew were good credit risks, were either manually underwritten, which costs more for the lender to analyze than by using an automated system, or sometimes they were deemed a higher credit risk than they actually were.

Scoring more people is all fine and well, but ultimately, a lender must make the decision to grant these individuals credit or decline them. So who are these people that make up what those of us in the industry commonly refer to as “the unscoreables?” Conventional thinking suggests they are young students, recent immigrants, and others new to the credit market.

Except that is only partially true.

Actually, as the graphic below suggests, the average unscoreable consumer has a good job and a better-than-adequate credit profile. In other words, the typical unscoreable consumer is, well…typical.

Credit Characteristics of the Unscoreable

One of the unfortunate outcrops of the unscoreable conundrum has been that consumers may be deemed high risk, or “subprime,” by traditional credit scoring criteria and/or lenders simply because they do not have significant credit histories. However, by using a different scoring methodology, we found many are actually quite creditworthy and identified as prime or near-prime consumers, which means they are less likely to become seriously delinquent on a loan.

Based on a VantageScore Solutions’ study, among infrequent users of credit, 15.5 percent were found to have either prime or super-prime risk profiles. And among new entrants to the credit scene, which include recently graduated students, immigrants or recently divorced consumers, 26.5 percent were found to have either prime or super-prime risk profiles.

When these consumers are not provided a credit score or mislabeled as being high-risk, it leaves them little alternative but to seek credit from lenders outside of the mainstream credit industry who may charge exorbitant interest rates.

Though VantageScore is indeed able to provide scores for the traditionally unscoreable, beyond our model, there are a number of other new solutions in the credit scoring market that tackle the unscoreable issue, but a great equalizer is rental payment history, which is now beginning to be reported by some landlords. Obviously, rent payments are a significant portion of a person’s total recurring monthly expenditures, as shown in the graphic below.

But unlike a mortgage payment, rent payment information isn’t widely reported to the credit reporting agenices when it could be a great tool for the unscoreables.

Specifically, according to Experian, 32 percent of renters are unscoreable without using their rental payment history. When the rent payment history is used to calculate a credit score, 87 percent can be provided a score.

Reporting rental payment history is unnecessarily controversial. Critics suggest that since lower income consumers traditionally rent, they are more likely to miss payments and have their credit history harmed than those with higher incomes. In fact, 45 percent of high-risk consumers increased their VantageScore credit score to 600 and above (note: the VantageScore model’s scale is 501 — 990) when rent data was used in calculating their credit scores.

Another important fact that is missed is that when ongoing rent payments are not reported, renters are not provided the positive impact of those payments. But when a renter becomes seriously delinquent on payments and their landlord hires a collection agent, the negative impact of a collection account being reported to the CRAs comes into play. It’s only fair that renters receive both the positive and negatives of their rent payment behavior.

If you do find yourself unscoreable, first, check to see if other credit scoring models provide you a score. Second, open a secured credit card. Be sure the card issuer reports payments to the three major CRAs. A benefit is that some of these cards convert to a regular credit card after a certain period of time.

Another option is to work with a lender that offers manual underwriting, or one with whom you already have an established relationship and knows your finances. Some of the major lenders have the ability to issue credit the old-fashioned way: by manually reviewing your credit files and other data to determine the specific terms if you qualify for a loan. Here again, be sure to work with a lender that is reporting payments so you can repopulate your credit files.

So if you find yourself to be among the millions that are invisible to some credit scoring models, you can take solace in that you are not alone, there are models out there that seek to recognize you, and there are steps you can take to rectify the situation.

Image: teclasorg, via Flickr

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