According to the Consumer Financial Protection Bureau one in 10 adults in America in 2015 is “credit invisible,” meaning that they have no established credit with a nationwide reporting agency. Another 8 percent have insufficient credit history, or a history that’s too old to track.
So what? Why does it matter for someone to be “credit visible”? And why do you even need a “good” credit score?
Your credit score — a three-digit number, generated by credit bureaus using your history of repaying debt — determines whether banks will extend you credit, how much, and at what interest rate. In the U.S., your credit score also determines your employment candidacy and your eligibility to rent an apartment, subscribe to utilities and services (e.g., cell phone, cable TV), or to even rent a car. When you have poor access to credit, you have limited or no access to capital that is often critical to start a business, pay tuition, or help cover emergency expenses.
The “credit invisibles” are disproportionately minorities, young adults, and new immigrants, and many also happen to be economically vulnerable. What makes them “credit invisible”? Are they financially incapable, unreliable, or just sneaky?
I hope not, because I’m one of them.
Ironically, I also happen to work for an impact investment fund that is particularly interested in expanding access to thin-file customers. While my team is on the cutting-edge of fintech, I have no credit history in the U.S. That’s led to some interesting conversations.
Here’s my story. As of January 2016, my U.S. credit score is zero. That’s right: zero.
Many of my Venture Lab teammates thought it wasn’t actually possible to score lower than 300. I don’t have any credit score yet because I’ve only recently migrated to the U.S. I moved to Washington, D.C. from Bangkok, Thailand (where I was working with a United Nations agency based there), in November 2015 to join Venture Lab. Prior to this, my financial behavior has not been captured or assessed by any of the three major U.S. credit rating agencies — hence, I’m a “thin file” or “credit invisible” customer.
I’ve paid off a car loan and a mortgage back in Indonesia. It is quite mind-boggling (and frustrating) that none of these factors could easily be taken into account to prove my creditworthiness to U.S. banks. I have almost a decade of mature financial activity under my belt, but because they took place in different countries, across different types of systems that track different information, every time I move to a new country I would always become a “thin file” or “credit invisible” customer.
Prior to moving to D.C. late last year, I have had experience living in the States for two years, from mid-2012 to mid-2014. You’d think I would have managed to find some credit history then, but I was a graduate student who was not earning any money and was trying hard to be careful about my finances. Moreover, I was relying a lot on my school’s facilities (e.g., campus housing) to get by. I managed to live in Manhattan for two years without needing credit or taking on any debt, happily using a debit card for transactions.
I didn’t care about my credit score then, and I probably never even gave it more than a couple minutes of thought. Back in Indonesia, where I’m from, a credit score isn’t a thing.
The awesome opportunity of joining the Venture Lab team brought me back to living in the States as a professional. All of a sudden, my credit score became one of the most important numbers in my life.
What it’s like to not have a credit score
Not having a credit score makes it harder to find a job, get utilities, or rent a car. Because I don’t have a credit score, I’m only eligible for a secured credit card. This doesn’t work like most plastic — I need to put down a $200 deposit to get a $300 credit line.
That’s not the only drawback. My credit invisibility forced me to put down four times the normal security deposit for my apartment. Something similar happened when I signed up for cable and a cell phone. Last weekend I was almost denied a rental car from Budget when they ran a soft credit check and found out that I don’t have a credit score.
To add more pain to the process, building — or rebuilding — a credit score takes time. A lot of time.
Not having a credit score in the U.S. really sucks. My personal complaints above are mostly “first-world problems,” and I’m fortunate enough to have the resources and knowledgeable friends help me navigate through my credit invisibility. But what about new immigrants coming from a war-torn country, or those who have lived here for a while but are undocumented?
Then there are also minority millennials. The Atlantic ran a fascinating article on the racial wealth gap faced by millennial people of color, noting that many are trapped in a vicious cycle of not being able to build assets due to a lack of family assets and greater family expenses.
Using alternative data to help thin-file customers
Credit invisibility became a fascinating topic for me as I learn and delve more into it. I lead Venture Lab’s work in capturing and articulating the insights we’ve gained from investing in and working with fintech startups that provide underserved customers with better access to finance. A number of our portfolio companies are working on innovative credit assessment mechanisms, with the aim of creating visibility for these “credit invisibles.” Ultimately, these new products should enable financial services providers to say “yes” to more applicants, while still managing a healthy risk level.
In the U.S., RevolutionCredit created an online platform which allows consumers to watch short and entertaining financial literacy videos to demonstrate and improve their financial capabilities – like a “traffic school for credit.” In India, CreditMantri helps consumers that are underbanked, have poor credit scores, or are new to formal financial services learn about their credit scores and improve their financial health through an automated web platform. In East Africa, First Access provides a credit scoring solution for microfinance institutions and other emerging market lenders, using data from consumers’ prepaid mobile phone histories to assess creditworthiness. Through these services, financial institutions can identify more creditworthy customers, extending access to a wider range of financial services at a better price.
We’re still at a relatively nascent stage of building business models for and realizing the full potential of alternative credit scoring for “credit invisibles.” There are a lot of challenges, ranging from regulatory restrictions to making a business model work and scale. Mark Hookey, CEO of DemystData, believes that a good use of data could be the silver bullet to financial inclusion, to address the required risks assessments in extending financial services. Hookey said he’s frustrated that financial institutions are just scratching the surface with alternative data, and that many emerging customers are kept out because of overly conservative regulatory frameworks and the perverse negative impact of well-intentioned privacy constraints. Great to hear that Mark’s frustrated and setting ambitious goals to address the issues — it’s encouraging to know that our entrepreneurs are working hard to crack the nut on such hard challenges.
Being an eternal optimist and someone who’s been living a rather peripatetic life, I have high hopes for more great innovations to help “credit invisibles.” Hopefully, fintech startups will soon come up with a global credit scoring mechanism, taking into account financial history from around the world.
In the meantime, I’ll try to be smart in using my secured credit card, paying my rent, utility bills, and gym membership on time. Most importantly, I’m very excited to work with our portfolio companies to build on and share the innovations on this space. And, of course, I’ll keep you posted on my credit score.