The CFPB has issued a new report, “Data Point: Becoming Credit Visible,” that discusses how consumers transitioned out of “credit invisibility” and how such transitions differed across consumers of different ages and across neighborhood income levels. For purposes of the report, the CFPB uses a definition of “credit invisibility” that includes only consumers without a credit record at one of the nationwide credit reporting companies.
The CFPB used a similar definition in its May 2015 report, “Data Point: Credit Invisibles,” in which the CFPB documented the results of its research into the demographic characteristics of consumers without traditional credit reports or credit scores. That report concluded that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities. While it did not use the term “disparate impact,” the report had fair lending implications for both providers and users of credit reports and credit scores.
The 2015 report was followed by a blog post in December 2016 in which the CFPB announced that it had released a brief, “Who are the credit invisibles?,” that described the 2015 report’s most significant findings and contained a checklist of action items for consumers who were new to credit or seeking to rebuild their credit history. Among the 2015 report’s findings highlighted in the brief were that consumers in low-income neighborhoods are more likely to have no credit history with one of the nationwide consumer reporting agencies or an unscorable credit file and that Black and Hispanic consumers are more likely to have no credit history with one of the nationwide consumer reporting agencies and have unscored credit records than White or Asian consumers.
The CFPB’s key findings in the new report based on the sample data used by the CFPB include:
- Almost 80 percent of consumers who transitioned out of credit invisibility did so before age 25, with consumers in low- and moderate-income neighborhoods who made this transition doing so at older ages than consumers in middle- or upper-income neighborhoods.
- Across all age groups and income levels, credit cards triggered the creation of consumer credit records more frequently than any other product with student loans the next most frequent trigger.
- Consumers in lower-income neighborhoods were more likely than consumers in higher-income neighborhoods to acquire a credit record from non-loan items, such as third-party collection accounts or public records, with almost 90 percent of these non-loan items conveying negative information about the consumer’s creditworthiness.
- About 15 percent of consumers opened their earliest reported credit account with a co-borrower and the credit records of an additional 9.6 percent of consumers were created when the consumer became an authorized user on someone else’s credit account, thus implying that about 1-in-4 consumers first acquire their credit history from an account for which others were also responsible. The use of co-borrowers and authorized user account status was notably less common in lower-income neighborhoods.
- The frequency with which credit cards trigger the creation of a credit record has been growing rapidly in recent years, except among consumers younger than 25 as to whom the share of credit records created as the result of a credit card has been declining. This decline cannot be fully explained by the growth in student loans or the restrictions in the Credit Card Accountability Responsibility and Disclosure Act on issuing credit cards to consumers under the age of 21 and marketing credit cards to college students.
In February 2017, the CFPB issued a request for information (RFI) seeking information about the use of alternative data and modeling techniques in the credit process. The CFPB indicated that the RFI stemmed from its desire “to encourage responsible innovations that could be implemented in a consumer-friendly way to help serve populations currently underserved by the mainstream credit system.” In the new report, the CFPB suggests that “the differences in the incidences of credit invisibility between higher- and lower-income neighborhoods may reflect the greater tendency of consumers in the latter to be unbanked” and “would imply that the problems posed by credit invisibility might be mitigated by promoting access to banking services in lower-income communities.”
The CFPB also indicated that the issues it hopes to examine in future research include the challenges facing consumers with unscored credit records and the characteristics of credit records (negative versus positive information) that result in transitioning out of credit invisibility.