Millions of Americans may have had difficulties getting approved for particular lines of credit they may have wanted in years past due to limited borrowing histories, but new efforts by the three major credit reporting agencies may give them a better chance going forward.
Not having much of a credit history was considered a major impediment to having access to anything from credit cards to mortgages, and many financial experts have said this isn't always necessarily fair, according to a report from the Wall Street Journal. This is because traditional creditworthiness doesn't always reflect a person's ability to afford a given line of credit, but rather their ability to properly manage accounts they've had in the past. But for new borrowers, or those who once had credit but had it go bad years ago for one reason or another, that could lock them out from accounts they might be able to afford with ease.
Bringing more into the credit system
Now, a number of companies are working on ways to bring these people, who are sometimes referred to as "credit invisibles" in the financial industry, into the borrowing fold, either again or for the first time, depending on their situation, the report said. For instance, Equifax and Experian recently introduced metrics that measure a consumer's ability to pay non-credit bills, such as rent, cable, phone, gas and electric obligations.
Likewise, American Express is now tracking the account management habits of those who use its new prepaid cards, as a means of determining their ability to properly handle one of the company's charge cards, the report said. TransUnion and Fair Isaac Corp. have both been using simple utility or rent payment data, respectively, to determine some of their credit scoring metrics for several years at least.
However, as time goes on, these tracking methods become more advanced and complete, with the potential endgame being that borrowers with damaged, limited or no credit histories will be able to use their good non-credit bill payments to get access to loans if they need them, the report said. However, there may be some issues for these consumers, even if these metrics can prove that a borrower is creditworthy.
The big problems
While these new efforts to more completely keep tabs on a potential borrower's financial life can be beneficial to those who have limited access to credit, it's as yet unclear whether banks will actually buy into the metrics developed by the top credit scoring companies in the U.S., the report said. Further, experts say that these new metrics may not be fair to all "invisible" consumers because those in lower income groups may intentionally skip payments on certain accounts as a matter of course, choosing instead to prioritize other concerns to better serve their families.
The latter problem is also on the national stage at this point because of a bill in the U.S. House of Representatives, the report said. Rep. James Renacci, a Republican from Ohio, introduced a measure in September that would update the Fair Credit Reporting Act to require that lenders factor rent and utility payments into their decisions when considering whether to extend a borrower a loan, and for the same reason, experts find the practice to be inherently discriminatory.
What credit invisibles can do
Making efforts to qualify for various lines of credit by working to pay all bills on time will of course be crucial to consumers trying to boost their scores. But for some people, this isn't easy because with limited borrowing histories and the lending industry the way it is currently, it's not easy to get even the most basic accounts.
Some will even have to open secured accounts if they want to establish, or re-establish, their standing in earnest, and in some cases, these accounts can be difficult for those living on lower incomes to afford because they tend to carry higher interest rates and more fees than traditional credit cards. However, those accounts that report to the credit bureaus will also help to improve a borrower's standing in a fairly short period of time, and therefore grant them better access to accounts that may be more beneficial in the future.
While many consumers with damaged credit standings are in their position because they mismanaged their accounts for some reason, others might be in that situation through no fault of their own. For example, some might have unfair markings on their credit reports, which will lower their ratings and making them less creditworthy. However, in these cases, they may be able to work with a credit repair law firm to potentially clear up the issue and return their standings to where they deserve to be.