Risks of credit-scoring bill are overstated

Current legislation designed to enhance consumer credit scores is a win-win for all concerned.

On June 25, the House unanimously passed The Credit Access and Inclusion Act, sponsored by Reps. Keith Ellison, D-Minn., and Robert Pittenger, R-N.C., which would amend the Fair Credit Reporting Act to clarify Federal law with respect to the reporting of certain positive consumer-credit information to consumer reporting agencies (i.e. rent, utilities and telecommunications). A Senate companion bill by Sens. Tim Scott, R-S.C., and Joe Manchin, D-W.V., has also been introduced.

Whether we like it or not, a good credit history is crucial in today’s economy. Far more than just a number, a good credit score is a prerequisite for accessing everyday financial products like a credit card, a personal loan or auto financing. It has also become a hugely influential factor in the tenant and employment screening process. However, those with no or a poor credit score have limited prospects. These consumers often turn to high-cost payday lenders to obtain credit and are unable to access rental housing or jobs.

Andrew Harrer/Bloomberg

According to Experian, 64 million Americans have no credit or a thin file. For these Americans, the need to build a positive credit history is paramount. However, building credit is often a vicious circle. If you don’t have credit, it is hard to get credit. But, if you can’t get access to credit, how are you ever able to build credit?

This is where the current legislation fills a gap. If regular bills can be reported to the credit bureaus, then positive behaviors such as paying on-time can be rewarded. Since most consumers have utility, telecom and rental payments, they would immediately benefit. Experian has found that including on-time utility payments has reduced the number of consumers marred with a subprime credit history by 50%. Similarly, LexisNexis has analyzed using a more expansive alternative data set, including such things as asset ownership and occupational licenses. Their results reveal 33% more minorities scorable and 31% more renters approved for credit products when alternative data is factored in.

Credit Builders Alliance is aware of the main objection to the pending legislation: the concern that this bill would damage the credit scores of millions of Americans. The worry is that late payments would result in a negative credit history. The contention is that “having a bad credit history is worse than having no credit history whatsoever.”

But CBA has not found this to be true.

Our experience with our more than 500 non-profit members located throughout the U.S. has been that the absence of a credit history remains a significant barrier to accessing credit products, rental housing and jobs among the 50% of employers who conduct a credit history check during their job application process.

Adding to CBA’s anecdotal evidence is research conducted by the Federal Reserve. In a study on alternative financial service providers, including payday lenders and pawn shops, the Fed found that there is no clear evidence that "no score" is better than a "low score." In fact, if anything, this data (table 2) suggests the opposite — AFSPs are congregating in higher numbers in “no score” neighborhoods than in “low score” neighborhoods. The proliferation of these types of alternative lenders in majority “bad” and no-credit neighborhoods suggests that they simply locate where the demand for their services is greatest, because a significant portion of the population does not qualify for more mainstream forms of credit.

A very important point to remember is that negative data is currently being reported on utility and telecom payments, if the past-due account is reported to the collection agencies. The fact remains that consumers are already experiencing negative information on their credit reports. This bill attempts to level the playing field by having positive payment history reported.

As a case in point, CBA led a successful rent reporting pilot with affordable housing providers. The act of reporting on-time payments for more than 1,200 residents resulted in 100% of the residents, who were previously credit invisible, now having a credit score. Additionally, the average VantageScore was 670, which brought them out of the subprime category.

Without the ability to build a credit history, millions of Americans will remain disenfranchised from the new economy, where credit histories and scores wield tremendous power.