Credit plays an important role in modern society. When granted and used responsibly, credit can open doors to opportunities like attending university, buying a car or a home, starting or expanding a business — opportunities that can help people broaden their horizons, build their career and wealth, attain greater freedom or peace of mind. For those with limited savings, credit can also provide a lifeline in case of emergencies.
On the other hand, when credit is overused, or used to finance expenses that a borrower can't afford, it can become a burden. The cost of servicing debt can make it difficult for an overextended borrower to save or to cover other expenses or, ultimately, lead to default. Responsible lenders try to avoid putting anyone in this position.
In seeking to avoid costly defaults, lenders commonly look for evidence of both ability and willingness to pay before they make a loan. Their most reliable gauge of willingness has been to look for a track record of repaying other debts, which creates a Catch-22 for those with little or no credit history. Nineteen percent of American adults (49 million consumers) don't have conventional credit scores. These include 28 million who have no mainstream credit file at the credit bureaus (likely because they never had credit before). They're credit invisible. Another 21 million have some limited information in their mainstream credit file, but not enough to generate a conventional credit score. They're unscorable.
In addition to these groups, another 57 million have scores that classify them as subprime — meaning that most lenders wouldn't lend to them, at least not at the same interest rates as prime borrowers. While a subprime credit score often reflects specific negative credit information, it may only represent a limited view. In the absence of recent positive history, even a small amount of dated negative information can drag down a person’s score, making it difficult to reestablish credit.
To different degrees, each of these groups faces information barriers to establishing credit, and these barriers create a source of frustration for those caught on the wrong side of them. At a societal level, such information barriers contribute to perpetuating disparities in access between historically advantaged and disadvantaged groups. For instance, while legal and regulatory reforms have long since banned the practice of redlining, Black and Hispanic Americans are still far more likely than White Americans to be credit invisible or unscorable, and less likely to gain access to mainstream credit.
As an industry, lenders can do better. They can expand access to credit, improving their social impact while growing their business, all without taking on undue risks. In recent years, expanded data sources have become increasingly accessible for credit decisioning. These include additional sources of payment history, more detailed and reliable information on current payment capacity (i.e., updated income and expenses), new attributes derived from such information, and alternative scores built upon such incremental information. By drawing upon these already-available data sources, lenders could score essentially all 21 million consumers who are conventionally unscorable, as well as the majority of applicants from the 28 million credit invisibles. For instance, Experian® estimates its Lift Premium™ score can score 96 percent of American adults — a significant increase from the 81 percent that are scorable with conventional scores relying on mainstream credit data. In addition, such enhanced scores would enable 6 million of today’s subprime population to qualify for “mainstream” (prime or near-prime) credit.
The research leading to this report was conducted by Oliver Wyman and supported by Experian who shared data-driven perspectives in bringing new data-related products to market. The views expressed in this report are those of the authors.