Susan Tompor: How Some End Up Without a Credit Score | Personal finance
Does the amount of money someone earns prevent them from getting a desirable credit score? Or their race and ethnicity?
The answers: No, absolutely not. Some consumers think the exact opposite, but your income, race, or ethnicity is not used to calculate your personal credit score and does not increase or alter your score.
Still, there are some social and economic factors that can affect getting a score in the first place. And many consumers who cannot be rated tend to live in the same area.
Unfortunately, factors like income and home ownership can leave consumers without a traditional credit score, which can fuel a cycle of financial stress.
âThe vast majority of banks won’t lend if a consumer doesn’t have a credit score,â said Silvio Tavares, the new CEO and president of VantageScore Solutions, a competing credit score system created in 2006 by the Big Three. credit reporting agencies.
VantageScore published an in-depth study that examined the tens of millions of consumers who do not meet the minimum scoring criteria required to receive a credit score from conventional credit scoring models.
The data has highlighted worrying trends in some neighborhoods in Detroit and elsewhere – and provides better insight into financial inequality.
Consumers without a score face much greater barriers to obtaining credit, according to a 2016 report from the Consumer Financial Protection Bureau. They can end up paying much higher interest rates for auto loans, credit cards, and personal loans. And some are being pushed to rely on predatory loan products.
In general, the Federal Consumer Watchdog has noted that invisible credit consumers tend to concentrate in areas of great poverty.
Up to 1 in 3 adults in Detroit – and up to 1 in 5 in the United States – don’t get a traditional credit score but could be scored with new approaches, according to a new study from VantageScore.
Almost 44% of consumers in low-income areas of northeast Detroit and about 39% of consumers in southwest Detroit are essentially ignored by conventional models, but can be assessed with VantageScore models, according to VantageScore.
As banks and credit unions seek to create better access to credit for historically marginalized communities, Tavares told Free Press, it is increasingly important to see that lenders are able to go further. beyond just revising a traditional credit score.
Tavares said a more inclusive credit scoring model, such as VantageScore 4.0, can help these consumers receive a predictive credit score, access credit, and ultimately find more economic opportunity.
In Michigan, 15.6% of consumers face such challenges and could be rated using the VantageScore 4.0 model, which became available in late 2017.
The challenges are even greater in other states, such as West Virginia where 20.4% of adult consumers are ignored by conventional scoring models but can be rated by VantageScore; Arkansas, where it is 19.1%; Louisiana, where it’s 18.6%, and Kentucky, where it’s 18.4%.
Breaking down this data by neighborhood – or public use microdata areas as defined by the U.S. Census – may be more revealing.
Three of the top 10 regions of the country facing credit scoring challenges that would benefit from the VantageScore model are in Detroit: Northeast Detroit, Southwest Detroit, and Mid-South-Southeast Detroit . A fourth Michigan community – in the Flint area – is in this top 10.
The No. 1 ranking on the Top 50 list goes to northeast Detroit, where the average income is $ 34,220 and 51.13% of the people who live there are renters.
Income has the strongest correlation with a person’s ability to achieve a credit score. And black consumers can be particularly disadvantaged because they tend to have lower income levels than other populations, according to VantageScore.
If you live in an area where household incomes are less than $ 50,000 per year, the report notes, you have a less than 50% chance of getting a credit score with conventional models compared to consumers who live in. communities with higher household income levels. over $ 90,000.
In order to generate a score, it is important to know that conventional models require at least one account opened and reported to the credit bureaus for six months or more; and at least one account that has been reported to a credit bureau in the past six months.
According to VantageScore, consumers living in areas with a high level of tenants – and areas with more limited access to bank branches – are less likely to score with a conventional model, even after controlling for other factors. .
Tavares said an additional 37 million consumers are now able to achieve credit scores using VantageScore’s latest scoring model. This includes 10.7 million black and Hispanic consumers who are affected by conventional credit scoring systems.
The report noted that 3.2 million black and Hispanic consumers who might receive credit scores under more inclusive models would achieve scores of 620 or higher using VantageScore 4.0.
In some urban areas, according to VantageScore, up to 30% of consumers who currently do not have a credit score could receive a predictive score using the latest more inclusive models.
In the Detroit metro area, just over 222,500 people who do not have a credit score would benefit from new, more inclusive scoring methods, according to VantageScore.
If someone isn’t sure whether they can get credit easily, Tavares said, it can be helpful to research banks and fintech apps that use VantageScore to increase their ability to get a loan.
Tavares noted that Fannie Mae and Freddie Mac use FICO scores when taking out mortgages, but efforts are also underway to try to expand the use of VantageScores.
The VantageScore 4.0 delivers scores in a range of 300-850, with scores between 661-780 rated as good and higher scores rated as excellent.
FinTech companies play a role in providing banking services and loans to those who are underserved.
For example, MoCaFi – short for Mobility Capital Finance – is an online bank that works with clients to provide a means of reporting rent payments to Equifax and TransUnion to improve their credit score with a positive payment history.
In 2019, Experian brought actor and activist Hill Harper to the Roasting Plant cafe in Detroit to launch a marketing effort for its Experian Boost product, where consumers allow Experian Boost to log into their online bank accounts to identify and access. to certain payments. the story.
Others recognize that more needs to be done to move beyond legacy systems that are killing too many people.
Nat Hoopes, vice president and head of public policy and regulatory affairs at Upstart, said lenders are showing a growing willingness not to be trapped in FICO scores and recognize that many consumers who do not have a history of credit are effectively solvent.
âPeople who have these limited credit histories can end up looking riskier than they are,â Hoopes said.
Other data, such as education and employment, can be factors that can help predict a person’s ability to repay, he said.
Actions consumers can take
While it’s important to understand how the system can hurt you, it’s also essential that consumers do what they can to build and maintain strong credit.
– Know what’s on your credit report. Get your free credit report from each of the three national credit reporting companies at AnnualCreditReport.com. During the COVID-19 pandemic, Equifax, Experian and TransUnion will continue to offer free weekly online credit reports until April 2022. Litigation errors. Look for signs of identity theft. Your credit report influences your credit score.
– Pay your bills on time. Focus on your budget and make sure you have enough cash to cover bills when they are due.
âCreate an emergency fund. If you have extra cash on the sidelines, you may not need to automatically accumulate a credit card balance to cover big bills, such as when new brakes are needed for the car.
âDo not borrow near the credit limit. Think about it. A consumer who borrows too close to âmaximumâ seems to be heading for financial trouble. Many don’t realize that your score is likely to be affected if you charge 40% or 50% or more of your available line of credit.
“Experts advise not to use more than 30% of total credit limits,” according to the CFPB.