If there is one thing that we take seriously in America, it is our independence. We like being able to go where we please and to do what we want to do. Of course, this fierce loyalty to independence helps to explain why we are so attached to our cars. Having reliable transportation is an institution in this country, and nearly everyone relies on having a car, truck van or SUV to get from one place to another. Some would even say it’s impossible to get by and stay gainfully employed without a vehicle.
The problem with transportation is that it takes credit in order to buy a car. As of right now, there are about 26 million people in this country (this translates to about 1 percent of American adults) who do not have any established credit. Some call this state of being “credit invisible” and it essentially means folks who have no credit file with the major credit reporting agencies. And you can add to that one percent another 8 percent of consumers who have “unscored credit records.” These are people who don’t have enough credit history to create a legit credit score. The credit reporting agencies make use of tradeline data to give people their customer scores. The information they use relates to the account, payment information and what type of account it is.
In order for the credit reporting agencies to predict and evaluate how people will use lines of credit, they must capture this information. It is important to note, however, that even with all of this information in hand, this data will not capture a true view of someone’s overall financial big picture. The agencies also use alternative data when scoring consumers, but this information is limited to public records, like liens and bankruptcies.
Most underbanked and unbanked consumers – the people who are credit invisible – are not sufficiently scored by the major credit reporting agencies. They simply do not have access to all of the important information available from alternative lenders, which lots of underbanked people use to get access to loans because they don’t have credit cards or access to loans from traditional banks. These alternative lenders often report information only to alternative credit reporting agencies. Without this kind of information in hand, lenders are missing out on providing service to a much broader base of customers. And consumers often fail to obtain auto loans, while also missing opportunities to improve their credit scores.
Lenders who use traditional credit data in conjunction with alternative lending data can provide consumers with better loans, while minimizing any losses. Tradeline data from alternative lenders helps to identify the higher-risk consumers while also providing opportunities for lower-risk borrowers. The end result is that lenders are able to provide loans for underbanked consumers who have profiles that are closer to what traditional credit reporting agencies consider to be ideal. What more could both lenders and borrowers ask for than a scenario where both of their best interests are served?
It may take some time for alternative credit reporting data to become more mainstream. This has to happen, though, if lenders are truly interested in broadening their customer base. Consumers, whether they utilize only traditional financial services or alternative financial services, deserve the chance to get auto loans and other lines of credit based upon their history and their likelihood of being able to stay current on their loans in the future. Once lenders have access to all of the pertinent information by way of consumers’ credit scores, they will be better equipped to serve the public.