Finding the Credit Invisibles

Adam Rust

Millions of Americans live without access to credit because they either have proven to be a poor risk or because little or no information exists to demonstrate their worthiness for a loan.

Often referred to among advocates as “credit invisibles,” they number in the millions. They are cloaked from the view of credit bureaus, caught in a kind of catch-22: they do not have credit, and as a result, the credit bureaus cannot gather enough data to assess their qualifications as borrowers.

It matters not that many credit invisibles make regular payments on their financial obligations. Positive payment data, such as those used to cover rent or to pay utilities, have historically been ignored by the bureaus. So even though records exist to verify their reliability, the data never makes it into the datasets used by the bureaus. It is important to note that all of the bureaus are working to include positive payments, as it could be the fix that dramatically reduces the ranks of the invisibles.

Last fall, the Consumer Financial Protection released a great study on the 26 million adults that it counted as credit invisibles. Their findings allow us to gather a greater sense of who is on the financial sideline.

Just as is the case with food, research identified neighborhoods where the invisibles congregated. Incidences of credit invisibility peaked in rural areas, low-to-moderate income census tracts, and in places with high shares of foreign-born residents.

The Bureau noted that census tracts with the highest rates of credit invisibles were the ones with the fewest bank branches. Living in a census tract with lots of credit-visibles had the complementary effect of meaning that your area had, on average, three times more bank branches.

However, areas with higher shares of people with lower socioeconomic status were not the only ones that qualified as deserts. For example, college campuses are often credit deserts.

The Bureau looked at the census tracts in Washington, DC with the highest concentrations of invisibles. The tracts where the highest rates of invisibles lived were in Foggy Bottom (George Washington University), Shaw (Howard University), Georgetown (Georgetown University), and Brookland (Catholic University) topped their list. Interestingly, when the Bureau limited their review to adults older than 25, deserts existed in three of those four neighborhoods.

Most students make the transition to credit visible when they establish a credit card account or pay down a student loan originated in their name. For these groups, credit invisibility is a temporary problem.

Unfortunately, many people have a harder time moving to credit visibility.

Two Bank Accounts for People who Need a Second Chance
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Credit invisible person who wants to establish a credit score

Positive Payment Data – The Aspirin for the Headache

By law, the bureaus must accept any documents that you want to submit to demonstrate your creditworthiness.

Unfortunately, while they have to accept your information, they do not have to use it as a factor in their models. You can save your receipts in your shoebox, but it may be to no effect.

In recent years, the bureaus have shown interest in adding more non-traditional “positive payment” evidence such as timely payment of rent or utilities. I applaud them for doing this, as it will increase the number of people who can become credit visible.

An example is TransUnion's CreditVision.

Congress has taken up legislation to address how the credit bureaus could enhance the collection of data on these invisibles. The Credit Access and Inclusion Act paves the way for utility companies, telecommunications providers to supply positive payment data directly to the bureaus. Unfortunately, doing so would involve changing many of the laws that protect the privacy of consumer data. Through federal pre-emption, The CAIA would as written allow those billers to transmit data even if state laws exist to prevent them from doing so.

The US House of Representatives passed a version of the CACI in July 2018. The Senate has not passed its version.

Thus, there is some good and some bad here. The shoebox solution – where consumers mail their utility bill statements to the Bureaus – is never going to work at scale. Solutions that facilitate the delivery of such information may do better, but even so, there will be limits on how many people they can serve. To take a proactive course toward establishing credit, invisibles first have to know that solutions are out there. That creates friction, as someone will have to cover the costs of acquiring customers, and it could blunt the predictive value of the data if only the most well-intentioned of consumers contribute non-traditional data.

Setting aside the privacy concerns, the value of the CACI approach is that it will go to scale. Almost every adult has either a phone bill or a utility bill, and in fact, almost everyone has both. The cost of getting data drops significantly. Moreover, since the volume of records will correspond well to all the invisibles, the data set will capture good and bad actors. That will eliminate “creaming.”

Some people say invisibles are better off staying invisible compared to being identified as poor credit risks. While that may be true, it is also the case that cloaking their defaults would undermine the interests of the invisibles who are demonstrating their reliability. We protect one at the expense of the other. Staying put keeps the count of invisibles at 26 million.

With advances in artificial intelligence, credit reporting will improve. Already, enhanced efforts are being applied by parallel bureaus in the UK and in Europe. Being invisible in England may become a thing of the past. Will it be the same for the invisibles in the United States?

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Adam Rust has worked to defend consumers against harmful financial practices since 2005. He has written extensively about overdraft fees, payday lending, student loans, refund anticipation loans, prepaid debit cards, and subprime mortgage lending. He serves on the Board of the US Faster Payments Council. He is Director of Research at Reinvestment Partners in Durham, North Carolina. He is the author of BankTalk. See more on his LinkedIn profile.