Credit scores are a key factor in determining not only whether someone qualifies for a mortgage or car loan, but also whether they can get good rates or higher limits on credit cards, obtain utility or cell phone service without a deposit, or get a lease or job. Yet Black consumers and other people of color continue to face barriers to access financial services and are more likely to have limited or no credit history as a result. Expanding the usage of alternative credit data will help more consumers access credit and improve the accuracy of the information used to determine creditworthiness.
Traditional credit scores are built on information about a consumer’s financial borrowing and repayment history, typically for things like student loans, car loans, credit cards, and mortgages. Many people have historically struggled to access these financial services. For example, as of 2020, 21 percent of U.S. adults do not have a credit card. As a result, 26 million consumers are considered “credit invisible” by the Consumer Financial Protection Bureau (CFPB), and 19 million are considered “unscorable” due to insufficient or outdated data. While traditional credit scores prioritize homeownership and on-time loan repayments, alternative credit data can help paint a more complete picture of an individual’s ability to pay their debts.
Alternative credit data refers to any data used to create a better understanding of one’s financial history and creditworthiness. This can be rent payments, utility payments, cell phone bills, or cash flow in a checking account. It can also be data about stability in residence or employment and include information about occupational attainment. Allowing rental payments expands credit data for consumers who do not own homes, and cash-flow data can help determine risk more accurately. A 2015 study by Experian found that making alternative data available to traditional credit bureaus resulted in fewer bad loans. Likewise, 89 percent of lenders find that alternative data allows them to extend credit to more consumers.
And yet, alternative data continues to be gravely underutilized. From 2016-2020, the Government Accountability Office (GAO) found that less than 0.3 percent of loans were underwritten using alternative data. This is largely due to regulatory uncertainty about data sharing and outdated privacy laws. For example, telecommunication and utility firms typically only report late payments to credit bureaus, and no law explicitly permits them to report on-time payments. Likewise, the Federal Privacy Act of 1974 and other privacy laws prevent the U.S. Department of Housing and Urban Development from reporting on-time rental payments without prior consent. GAO also found that structural inefficiencies at credit bureaus meant that lenders must manually underwrite loans that use alternative data because automated systems do not currently accept non-traditional data types. While CFPB has been updating definitions to create more flexibility for lenders primarily with rental payment data, Congress has yet to codify the use of alternative data and as such the current credit system continues to exclude many Americans.
Still, the impetus for credit reform exists in Congress. Three key pieces of legislation focusing on alternative credit data and financial inclusion are currently under consideration. The Financial Inclusion Act of 2021 has passed the House of Representatives as an amendment to the Consumer Financial Protection Act of 2010 and aims to create an Office of Community Affairs to focus on un- or underbanked consumers. Likewise, the Comprehensive CREDIT Act first passed the House in 2020 and has since been reintroduced during the current Congress. It would allow payment history of rent, utilities, and telecom services to be furnished to the credit reporting agencies. It also establishes a dispute mechanism and aims to increase transparency in the credit scoring process. Finally, the Credit Access and Inclusion Act would explicitly allow reporting of on-time payments from utilities and update federal privacy law to allow all landlords to report on-time rent payments. In 2021, Senators Tim Scott (R-SC) and Joe Manchin (D-WV) reintroduced the Act, where it has since been referred to the Committee on Banking, Housing, and Urban Affairs.
It has been nearly two decades since Congress passed credit reporting reform. It is time to clarify uncertainties left by various rulemaking efforts within executive agencies and explicitly allow reporting of alternative credit data. An effective financial system can only be one that includes all Americans.