Credit Invisibles and the Unscored

The views expressed in this article are those of the authors and do not necessarily reflect the official positions or policies of the Consumer Financial Protection Bureau or the US. government.IntroductionIn the United States, nationwide credit-reporting agencies (NCRAs) compile and sell records that detail the credit histories of millions of consumers.1 Lenders use these records pervasively to assess creditworthiness when underwriting or pricing credit. They are widely used for purposes beyond credit granting as well. For example, they may be checked when setting auto and homeowner insurance premiums, establishing new utility accounts, renting housing, or hiring new employees. As a consequence, credit records affect the financial well-being of consumers in many ways.The widespread use of credit records has drawn the attention of policymakers toward consumers with limited credit histories, meaning either that their credit record contains very little information or that they have no credit record at all. Much of this attention has focused on alternative sources of data that might supplement the information collected by the NCRAs and mitigate the problems that these consumers face. Examples of alternative data that have been suggested include utility payments (Experian, 2014; Schneider and Schutte, 2007; Turner et al., 2006), rental histories (Experian RentBureau, 2014), and remittance histories (CFPB, 2014).2Despite this attention, very little is known about the scale of the problem or about the characteristics of consumers who are affected. Estimates of the number of people without credit records vary widely and the methodology used to produce these estimates has rarely been disclosed.5 Moreover, the varying estimates of the number of consumers with limited credit histories provide little information about the populations themselves. Yet, such information is crucial for evaluating potential solutions. For example, utility payments may have a lot of value in predicting credit performance, but they can help only consumers with limited credit histories who have utility accounts in their own names.Our analysis takes the first detailed look at consumers with limited credit histories. We focus on two groups of such consumers. The first group, "credit invisibles," includes consumers without NCRA credit records. These consumers likely face restricted access to credit because lenders cannot use NCRA records to assess their creditworthiness. The second group, the "unscored," consists of consumers whose NCRA credit records cannot be scored by conventional credit-scoring models. Generally speaking, a credit record may be treated as unscorable for two reasons: (1) it contains insufficient information to generate a reliable score, meaning that the record has loo few accounts with sufficiently long payment histories; or (2) the information has become "stale," in that the record has no recently reported information.4 Because many lenders rely on credit scores to assess creditworthiness, an unscored credit record can impair credit access in much the same way as not having a credit record. We present results for both types of unscored credit records, which we refer to as "insufficient-unscored" and "stale-unscored."Reliable data on the population with limited credit histories are difficult to come by, particularly for the credit invisibles. Although samples of credit bureau data will generally contain information about the number of consumers with unscorable records, by definition, they contain no information on credit invisibles. Credit-record samples also do not contain any information about the demographic or other non-credit-related characteristics of the consumers, making profiling even those with unscored records difficult based on credit-record data alone. Other data sets, such as the Survey of Consumer Finances or the American Community Survey (ACS), that contain representative information about the adult population do not indicate which consumers have limited credit histories and, therefore, by themselves, are of limited use in profiling consumers with limited credit histories. …