Lenders try new ways to help the ‘credit invisible’
By Peter Fullam
February 22, 2016
An estimated 45 million Americans have little or no credit files. These “credit invisibles” are often millennials, minorities, people just starting out or rebuilding credit, or those new to the U.S. Seeing an underserved market, lenders increasingly are reaching out to these consumers with new products and new ways to measure creditworthiness.
While the majority of Americans have a credit file, a May 2015 Consumer Financial Protection Bureau study found about 26 million Americans are “credit invisible.” That means 1 in 10 adults do not have any credit history with the three major credit bureaus, Equifax, TransUnion and Experian.
An additional 19 million Americans have insufficient credit histories to have a FICO score, the CFPB says.
“When consumers do not have a credit report, or have too little information to have a credit score, the impact can be profound,” CFPB Director Richard Cordray said in prepared remarks about the report.
Not having a credit file affects one’s ability to obtain home mortgages, auto loans and credit cards. Credit scores also are used by some employers in making hiring decisions and by landlords deciding whether to OK a potential renter or how much money to require for a security deposit.
“Many — especially minorities — suffer from a lack of credit history that makes them unscorable and particularly hard to reach or serve effectively and responsibly. This creates a ‘Catch-22’: How do you build the credit history to qualify for credit if no one will lend to you due to lack of credit history.”
— Marivi Lerdo de Tejada, Oportun spokeswoman
— California lender Oportun developed a system for measuring creditworthiness that has allowed it to service Hispanics who lack a credit history and can’t qualify for conventional loans.
— Across the Sunbelt, BBVA Compass bank is testing alternative credit scoring to make small consumer loans to credit-challenged consumers.
— Discover and BBVA both offer new cards that either build credit histories or use alternative data for qualification and approval.
Scoring the “unscorable”
Oportun, which has branches inside shops in Latino neighborhoods, has been targeting underserved Hispanic consumers. Since its founding in 2005, the company, based in Redwood City, California, has helped more than 689,000 customers by disbursing $2.2 billion through more than 1.3 million small-dollar loans.
With bilingual staff at 179 locations in California, Illinois, Nevada, Texas and Utah, Oportun’s loans range from $300 “starter” loans to $6,000 loans for returning customers.
Oportun “scores the ‘unscoreable’ by assessing data analytics and nine years of insights gained from serving customers,” says Marivi Lerdo de Tejada, senior director of corporate communications.
“Many — especially minorities — suffer from a lack of credit history that makes them unscorable and particularly hard to reach or serve effectively and responsibly,” she adds. “This creates a ‘Catch-22’: How do you build the credit history to qualify for credit if no one will lend to you due to lack of credit history?”
“Building a long-term relationship”
Some card issuers, such as Discover and BBVA Compass, are offering cards targeting this market.
The Discover it Secured Credit Card, which rolled out in January, is a secured card with unsecured card perks. Like most secured cards, it requires a deposit equal to the maximum charge balance, but it has no annual fee and cardholders earn cash back rewards. Cash back also is doubled at the end of the first year. All the while, the cardholder is building a credit file with the three major credit bureaus.
“We want prospects to build their credit history, and ultimately the goal is to build a long-term customer relationship,” says Jerry Young, Discover’s director of acquisition marketing.
After a year, Discover will review the account to see whether the cardholder can transition to a regular, unsecured credit card.
“We want prospects to build their credit history, and ultimately the goal is to build a long-term customer relationship.”
— Jerry Young,
of acquisition marketing
Serving the “underserved”
BBVA Compass, a Birmingham, Alabama-based bank, teamed up with alternative credit agency eCredable in December to provide their BBVA Compass NBA American Express credit card for those who can’t get some banking services due to a lack of credit history.
BBVA will consider eCredable’s AMP Credit Score, which looks at an applicant’s history of payments, such as rent and utility payments, to establish creditworthiness.
The BBVA Compass American Express NBA credit card has no annual fee, a credit limit of up to $2,000 for those applying through the eCredable website and offers points for all purchases, including five times points for every dollar spent during the two weeks of the NBA Finals.
“What we’re testing in the pilot is finding ways to understand the behaviors of clients in the underserved market in ways that legacy credit bureau vehicles for banks just can’t,” says Ryan Kraynick, BBVA Compass executive director of payments.
Even FICO is trying broadening its scoring
Lenders aren’t alone in trying to reach those with little or no credit files.
Most lenders rely on FICO scores to analyze a loan applicant’s financial history and determine whether to make a loan and what interest rate to charge. FICO scores take into account payment history, amount owed, length of credit history, credit mix and new credit.
Recently FICO, the king of credit scores, kicked off a pilot project expanding the number of consumers whose records can be scored using alternative data on utility and cellphone bill payments and property records, said the CFPB report. LexisNexis, RiskView and VantageScore also have introduced or use alternative scoring models.
For BBVA’s Kravnick, trying to reach consumers in need of credit but unable to get it is a huge potential audience for the bank with branches in Texas, Alabama, Arizona, California, Florida, Colorado and New Mexico.
“We have a huge opportunity to serve the underserved market in our footprint,” he says. “I think all banks face that challenge.”