Helping lenders say “yes” to more potential borrowers
Fair and affordable access to credit can unlock new opportunities and provide consumers with the ability to build generational wealth. Unfortunately, not everyone has access to the same resources. People from underserved communities, as well as younger consumers and recent immigrants are often excluded from the mainstream financial system because they lack extensive credit histories. Consequently, these consumers may pay higher costs for loans and other financial products.
In reality, our recent research with Oliver Wyman found that nearly 106 million U.S. consumers are unable to obtain credit at prevailing rates, either because they are invisible to credit, unscored by conventional credit scores, or because they have a credit score subprime or lower. That’s 42% of the American adult population who can’t get credit at current interest rates.
We know lenders want to say “yes” to more potential borrowers. Extending credit to consumers who have been largely ignored by the credit system offers the opportunity to build lasting relationships with a relatively untapped market, remembering that it’s simply the right thing to do. As a result, our industry has been a driving force behind innovative solutions, driving significant progress towards improving financial inclusion.
The approach behind saying “yes” more often
There’s a notion that consumers without extensive credit histories represent a significant inherent risk, but frankly, that’s not always the case. Some consumers currently perceived as unassessable or invisible to traditional credit models may have outstanding credit scores in other countries, while others simply haven’t had the opportunity to establish and develop a credit. But just because consumers don’t have extensive credit histories doesn’t mean they’re inherently risky. Adding one-time payments for telecommunications services, utilities, and even video streaming services to consumers’ credit reports can help clarify this notion.
The challenge is to ensure that the data enters the system. Without this, conventional credit scoring models based on common payment information are limited in their ability to help increase financial inclusion. Many consumers who do not have access to mainstream credit must rely on higher cost, short-term loans.
In addition to encouraging consumers to allow their non-debt payment information, we explore other types of data, such as trending credit data, expanded public record data (i.e., say professional license information) and data on reimbursement of short-term small dollars. loans. Considering these extensive data sources – which are regulated by the Fair Credit Reporting Act – in the decision-making process can give lenders a more complete view of a consumer’s ability and willingness to repay outstanding debt. – a practical solution for granting credit to consumers without taking on additional risk.
Rely on innovative technology
Despite the growing adoption of broader data sources, most conventional credit scoring models are more dependent on common payment information (credit cards, loans, etc.). As an industry, we need to make this data accessible to more lenders.
Leveraging credit scoring models that incorporate extensive data sources opens up the pool of creditworthy borrowers that lenders can work with. For example, we found that 96% of loan applicants can be assessed using Experian Lift Premium. This includes approximately 65% of the invisible credit population and the entire non-conventionally assessable population. This is significantly more than the 81% of consumers who can be rated by conventional scores. Additionally, 6 million consumers whose conventional scores are subprime could be upgraded to near-prime or above when extended data is incorporated.
Although the industry has made significant progress in improving financial inclusion, more needs to be done. We remain committed to delivering innovative solutions and creating more credit opportunities for consumers. Helping lenders facilitate access to fair and affordable credit is a given. A more inclusive financial system leads to opportunities for wealth creation and ultimately a more productive and stronger economy.
Greg Wright is Chief Product Officer and Executive Vice President at Experian Consumer Information Services