Experian aims to bring millions of Americans into the mainstream credit market by incorporating rental data into credit reports. RentBureau, which Experian acquired last June, is the largest collector of rental payment data. It collects and reports rental data from property management companies nationwide so lessors can screen potential tenants. Experian's announcement earlier this month that it will include positive rental data is being billed as a new way for the estimated 50 million unbanked consumers to build credit.
Credit scores have increasingly become a key factor in families' ability to acquire assets. Credit scores are used to determine whether or not a family can get a loan to buy a home or a car, start a business, fund post-secondary education, or even obtain a credit card. Employers are also starting to use credit scores in the hiring process to screen applicants. Thus, a thin credit file or a low credit score can prevent families from acquiring the assets that lead to economic mobility.
For these reasons, consumer advocates, credit analysts, and lenders have been exploring different options for calculating credit-worthiness. The reporting of nontraditional or alternative credit data has frequently been suggested as one of these options. Since traditional data, such as credit cards, mortgages, and student loans, are not typically available for lower income families, the use of nontraditional data, such as utility bills, mobile phone bills, and rental payments, is viewed as a means of incorporating these individuals into the credit reporting industry. For example, one third of people in the United States are renters and now, like mortgage owners, their payment histories will affect their credit scores.
Yet, there is much debate as to whether the inclusion of nontraditional credit data will be helpful or harmful to low-income and credit-thin families. Some argue that such reporting will catapult previously excluded families into the mainstream lending market, allowing them to access the credit needed to build assets. Others argue that alternative reporting could prove to be harmful and be used to further marginalize low-income families. If, for example, a family must choose between paying for groceries or paying the light bill most families will choose groceries, thereby negatively affecting their credit scores. The Shriver Center addressed this issue in-depth in the Clearinghouse Review article, Alternative Credit Data: To Report or Not to Report, That is the Question, and facilitated a discussion of industry experts in a webinar, Credit Scoring and the Un-Scored: Alternative Credit Data. Although, Experian's announcement highlights the fact that its use of positive rental data in its calculation of consumers' FICO scores "will... help many renters who are looking for ways to rebuild their credit scores due to financial hardships such as a foreclosure or a bankruptcy," it omits the fact that in 2012 Experian will also begin reporting negative data (i.e. missed payments). Reporting such negative data will most certainly push those same families struggling to recover from foreclosure and bankruptcy out of their rental homes.
To be financially stable members of the U.S. economy, families must have access to credit. It remains to be seen whether reporting alternative data is the appropriate way to ensure low-income and asset-poor families' successful entry into the mainstream credit industry. One thing for certain is that Experian's so-called concern for those "recovering from financial hardship" is not all that it seems.
Kelly Ward, Asset Opportunity Associate, Shriver Center, coauthored this blog post.