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While a recent survey found that nearly 35% of consumers have never pulled their credit report, a new report from the Consumer Financial Protection Bureau points out that some of those consumer might not have anything on their reports anyway.
The CFPB released a report [PDF] today finding that 26 million Americans – or one in every 10 adults – are “credit invisible,” meaning they have no credit history with national credit reporting agencies. And another 19 million consumers have credit records that are treated as unscorable under the traditionally used credit scoring model.
Many of the unscored consumers were put in the category because they either have insufficient credit histories or because the credit history available is too old – or “stale,” the CFPB reports.
While one might assume that having no credit history is better than having bad credit history, both groups of consumers are at a significant disadvantage – having little chance of obtaining needed lines of credit.
“A limited credit history can create real barriers for consumers looking to access the credit that is often so essential to meaningful opportunity—to get an education, start a business, or buy a house,” CFPB director Richard Cordray said in a statement Tuesday.
This graph shows the percentage of consumers that are considered unscored or credit invisible by age.
Credit reports – furnished by three national credit reporting agencies: Experian, TransUnion and Equifax – are used to reflect how a consumer has repaid their debt.
These histories often contain information such as bank loans, car loans, credit card bills, student loans, and mortgages.
The reports are then used by lenders to determine how or if they should extend credit to the consumer, and at where the interest rate should be set.
The CFPB’s report found a strong relationship between consumers lacking a scored credit record and their income levels.
The CFPB report identified a relationship between consumers’ income and their likelihood of being unscored or credit invisible.
Most of the consumers who are placed in the credit invisible category by credit reporting agencies are from low-income neighborhoods.
Of the consumers who live in low-income neighborhoods, almost 30% are credit invisible, with another 15% having records that can’t actually be scored.
The percentage of consumers in low-income neighborhoods that are either credit invisible or unscored is significantly higher than the rate in higher-income neighborhoods.
In fact, the report found that only 4% of consumers in upper-income neighborhoods are credit invisible, while 5% are unscored.
When it comes to ethnicity, the CFPB report found that black and hispanic consumers were more likely to fall into the credit invisible or unscored categories.
The CFPB also found a relationship between ethnicity and unscored or credit invisible consumers.
About 15% of black and hispanic consumers are credit invisible compared to 9% of white consumers. Additionally, nearly 13% of black consumers and 12% of hispanic consumers have unscorable records, while just 7% of white consumers fall into the category.
Cordray says in a statement that understanding prevalence of unscored and credit invisible consumers and their characteristics will prove to be an integral part of the CFPB’s work to foster a helpful marketplace for all consumers.
The CFPB’s findings come a month after reports began to surface that FICO would overhaul its credit-scoring approach to consider consumers’ monthly bills, such as those for utilities and wireless plans, when determining credit worthiness.
The change is purportedly intended to help consumers on the low-end of the credit spectrum, but some consumer advocates are concerned that lower-income Americans could be the ones most adversely affected.
While providing more credit options for people is a good thing, basing a consumers’ creditworthiness on utility payments could have a negative affect on consumers struggling to make ends meet month-to-month.
The National Consumer Law Center previously provided testimony during a House subcommittee hearing exploring the uses of consumer credit data, including the use of utility payments in credit reports.
Chi Chi Wu, staff attorney for NCLC, expressed advocates’ fears that using the additional information would “add millions of news negative reports to the credit reporting system and will actually hame more consumers, especially financially strapped consumers, by creating credit black marks.”
CFPB Report Finds 26 Million Consumers Are Credit Invisible [CFPB]
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