Without a credit history, it can be difficult to be approved for a loan or credit card.
According to Experian, its new Extended View score, which makes use of rental and public record data, could change that by helping lenders assess applicants who lack traditional credit histories. But will it help more consumers get credit?
Evaluating the underbanked
More than 64 million Americans live without using traditional banking services such as checking accounts, savings accounts and credit cards. That makes it difficult for lenders to get a read on them. However, one-third (20 million) of these so-called “underbanked” consumers should be able to qualify for mortgage loans and other types of credit, according to estimates from Experian.
But try as they might, without any type of credit record or banking history, many underbanked consumers won’t qualify, even if they pay all their other bills on time.
Traditional credit scores, such as FICO scores and VantageScores, which most lenders use, predict future credit behavior based on how a person has handled credit payments in the past. It’s a simple concept: If you have a history of paying your credit card bills or other loan payments on time and don’t run up high credit card or loan balances, chances are good that you will continue to manage new credit responsibly as well.
People without any kind of previous credit usage, however, face a Catch-22: They can’t get credit because they don’t have a credit history, and they can’t get a credit history, because they don’t have credit.
And that, Experian says, is where its Extended View score comes in. The score is designed to provide a picture of the creditworthiness of so-called underbanked consumers.
So how will the Extended View score predict the future credit behavior of consumers who don’t use any type of credit or traditional banking services? According to an Experian press release, the company will use rental payment history, payday loan repayment history and even public records of liens, missed child support payments and other signs of fiscal irresponsibility. That information will be combined with Experian’s existing credit data. Scores will range from 401 to 900, similar to the VantageScore created by the three credit rating agencies Experian, Equifax and TransUnion.
Will it help?
If you fall into the underbanked consumer segment, but have a history of reliable financial behaviors, can you now apply and get accepted for a loan? According to Experian, 15 lenders, both small and large, are already considering using the score. Experience expects the score to be used not just by banks, credit unions and auto lenders, but also by cellphone and utility providers as well.
“It may well help people who are managing their finances in a very responsible manner, but are locked out of the world of credit for one reason or other,” says Bruce McClary, media relations director with ClearPoint Credit Counseling Solutions. “I’m all for leveling the playing field and making credit more accessible to more people and reward people for responsible money management. Everyone wins in that case.”
Still, it may take some time for the score to catch on with lenders. For the new score to help consumers, lenders have to use it.
“The only sticking point with this is that it remains to be seen how many banks embrace the Extended View score as a tool to make credit available to people in this category,” says McClary. “There are so many credit scoring models that have been tried in the past, but lenders don’t necessarily embrace them. So a lot will depend on how much lenders embrace it. It’s hard to tell where it’s going to go.”