Bringing “Credit Invisibles” Into the Light

Too many people suffer from a lack of credit history, a condition that deprives them of access to homes, cars – even jobs. They are the “credit invisibles” and some new data sheds light on ways to improve their lot in life.

Information services company Experian said its research estimates there are 64 million consumers with limited credit history to no credit history, who are unscoreable or “credit invisibles.” The company said it teamed with the non-profit Credit Builders Alliance in an effort to gauge the value of credit building to these individuals.

Credit Builders Alliance was created to serve as a bridge between its non-profit members and the major credit reporting agencies (CRAs), such as Experian.

Its core services, CBA Reporter and CBA Access, provide nonprofit lenders with the ability to report loan data to the CRAs and to pull low-cost client credit reports for the purposes of financial education, outcome tracking, and underwriting, the organization said.

CBA’s non-profit members often have loan programs in place to serve financially marginalized communities. In the past, people who repaid those loans responsibly did not receive acknowledgement, (in the form of healthy credit scores), since the non-profits had no way of reporting their payment performance to the credit bureaus. CBA sought to fix that.

With its latest study, Experian and CBA set out to track the results of this credit reporting, and found that low-income borrowers who paid off their loans per term got a big boost in their credit scores. They essentially became “visible” to the credit agencies – and therefore to anyone who uses credit score data to assess the prospect of doing business with that individual.

By having a healthy credit history, people gain access to mortgage loans, small business loans and other forms of credit. Since companies are now checking the credit reports of job applicants, having a good credit history has even become an essential requirement for getting a job.

According to the research 58% of the borrowers studied experienced increases to their VantageScore credit scores, with the prime population increasing their by 5%. More than 20% of the study subjects moved to a lower risk category, (i.e., from subprime to nonprime), and more than 73% of consumers increased their active, open trades.

Lowering one’s risk category – and increasing one’s credit score – can have a dramatic effect on the affordability of consumer credit. Experian cites the example of a borrower moving from a $10,000 five-year auto loan at 17% APR to one with a 3% APR, and saving around $4,000 over the life of the loan.

We’ve all seen how high-interest lenders — (including payday lenders and pawn shops) – proliferate in low-income communities. Often, these firms offer the only credit products that members of low-income communities have access to, since many of the people in these communities are among the “credit invisibles.”

By raising credit scores through comprehensive reporting on loan repayment activity, organizations like CBA help enable people to broaden their credit choices, and save a lot of money in the process.