How expanded credit data can help tackle inequities
The recent jobs numbers provide a glimmer of hope that the worst of the pandemic recession in the United States is behind us. Even so, we must guard against a recovery that exacerbates the inequities that have been so apparent well before we ever heard of COVID-19.
One of the key pathways to opportunity in this country is access to credit, yet what should be a gateway is too often a roadblock because so many people have limited credit histories. Indeed, about 60 million people in the U.S. — the equivalent of the populations of California and Florida combined — have a thin credit file or none at all, and that puts them at an economic disadvantage.
Credit reports are intended to be factual reflections of a person’s credit history. But for millions of Americans, credit reports — or the lack of a credit history altogether — reflect something else: an economic system that is imbalanced, especially for communities of color, low-income families, younger adults and immigrants. Because of this, some of the steppingstones to the American Dream — such as college education, homeownership and entrepreneurship — are simply out of reach for too many people.
We believe the way to create a fairer system for everyone is for credit reports to include more — and better — data. By expanding the types of data that go into credit reports and offering ways for lenders to get a more comprehensive picture of people’s financial histories over time, our financial system can work for more Americans.
Traditional credit reporting doesn’t reflect many of the ways today’s consumers demonstrate creditworthiness. Our company has long advocated for additional financial information to be included in these reports — such as rent, phone, cable, internet and utility payments — to paint a more complete picture of a consumer. This alternative financial data, when available, helps capture how Americans meet their monthly financial obligations, and in turn, helps lenders extend more credit.
In August, Fannie Mae charted a course for others to follow by allowing lenders to take rent payment history into account when underwriting mortgages for first-time homebuyers. Freddie Mac followed suit this month with a program that encourages landlords to report on-time rent payments to credit bureaus. These changes can significantly improve how a person’s creditworthiness is viewed by mortgage lenders.
This shift, applied more broadly, would benefit millions of renters. When rent payments are included in the credit file, consumers’ credit scores increase nearly 60 points on average, according to our recent analysis. A U.S. Department of Housing and Urban Development study found that reporting public housing rental payments considerably increased the number of people whose credit could be scored. And a 2017 study by the New York City Comptroller found that providing rental history data to credit agencies would raise credit scores for 76 percent of tenants.
There is deep consensus that the reporting of this data creates a more accurate financial picture for many Americans, but alternative financial data is not always available to the credit reporting agencies and lenders, and using it is not yet the norm. The system must change, but the changes will not take root through the actions of credit reporting agencies alone. Landlords, phone companies and utility providers need to report their consumers’ responsible payment behavior so that those hard-working Americans can get the credit they deserve for regularly meeting their financial obligations.
Congress has a critical role to play in advancing credit inclusion through alternative data. Sens. Tim Scott (R-S.C.) and Joe Manchin (D-W.Va.) and Rep. French Hill (R-Ark.) have championed The Credit Access and Inclusion Act to encourage the reporting of rent, utility and phone payments to the credit reporting agencies. With this information, lenders can receive a more comprehensive picture of a consumer’s creditworthiness and expand their ability to extend credit to those who need it most. We know, too, that members of our military are often underrepresented in the credit ecosystem because the sacrifices of their service — such as delaying a major purchase — can limit their “credit visibility.” Sens. Scott and Richard Blumenthal (D-Conn.) sponsored the Building Credit Access for Veterans Act earlier this year to help veterans and servicemembers access more affordable homeownership opportunities. This legislation would establish an alternative data credit scoring pilot program for home loans that are backed by the U.S. Department of Veterans Affairs. Both of these bipartisan pieces of legislation deserve passage without delay.
If alternative data is widely captured on credit reports and used by lenders in credit underwriting, the benefits would cascade across generations and all corners of America. Underrepresented consumers who have been economically sidelined would suddenly gain access to the credit they deserve. More families would be able to flourish in the financial ecosystem, constructing legacies of prosperity they can pass along to their children. The whole of the U.S. economy would thrive if more credit-invisible people were welcomed into the financial system.
Our company’s efforts are significant, but progress on the scale our nation needs requires an all-hands-on-deck approach. Equity and credit access must be our nation’s collective goal, as we cannot celebrate an economic recovery that leaves tens of millions of Americans behind.
Christopher A. Cartwright is president and CEO of TransUnion, an information and insights company that serves as one of the three national credit reporting agencies in the U.S.