Credit Reports Need to be More Inclusive to be Accurate
A high credit score is one of those things that most American adults see as a milestone in their post-adolescent successes, and it really is a significant step in attaining financial independence and security. However, for millions of Americans, getting a foot in the door to even establish a credit history, can be something that seems insurmountable.
Currently one out of every five Americans simply does not have any substantial credit history for traditional credit reports to go on. Surprisingly, 63 million Americans are underbanked or completely unbanked; 92 million have little to no credit history, 67 million have a “thin” credit history, and 25 million are considered to be credit invisible.
Unfortunately, those who are most likely to be unseen by creditors are those who may also have other disadvantages that make it difficult for them to get ahead financially. They are likely to be young or new to credit, newly divorced or widowed, recent immigrants, Hispanic or African American, those who rely mostly on debit cards or cash, among other things.
The most frustrating part of the issue is that, in many ways, it takes a credit history in order to begin establishing a credit history. Credit card companies and other lenders are far less likely to open accounts for those who have no credit report to go on, and if they do, they are likely to strap on the highest interest rates possible.
In many cases, this means that credit invisible individuals are resigned to use expensive services in case of an emergency. Services such as check cashing or pawn shop loans can pack a punch to the wallet and end up costing much more than the temporary relief is worth. This can be especially concerning as 60% of Americans say they would not be able to cover an emergent cost for one thousand dollars, and would have to borrow money should the unforeseen arise.
The reality is that, just because an individual has little to no credit history, does not mean that they are financially irresponsible. In fact, if credit reports were to include alternative data, such as rental history, utility bill payments, and phone payments, then 90% of credit invisible persons could finally receive an accurate score. Not only that, but nearly half of them would be shown to be prime or near prime borrowers.
As the financial world makes changes that reflect the modern culture, it’s important to take a look at traditional credit reports and to make them more inclusive to every American.
