Experian today became the latest credit scoring firm to roll out a new tool to measure credit risk, one that could put more financial products in the hands of people with little or no credit.
With Tuesday’s launch of the Emerging Credit Score, Experian also joins a growing movement to put more of Americans’ financial lives under scrutiny, upping the ante for anyone who occasionally misses a rent payment or a utililty bill deadline.
“The unbanked and underbanked consumer population presents an expanding market opportunity for financial services institutions, particularly in today’s economic environment,” Experian Senior Vice President Zaydoon H. Munir said in the announcement. “Our goal has always been twofold: to help underbanked consumers get the credit and affordable financial services they deserve and to provide our clients that serve these consumers with the best risk-management tools.”
Its new credit scoring tool uses Experian’s data blended with data and evaluation technology from eBureau, a St. Cloud, Minn., maker of financial information tools. The tool will “evaluate the purchase and payment histories of consumers with little or no credit history, providing an increasingly granular view of the thin-file and no-file consumer segment.”
Traditionally, credit scoring was based on lending payment behavior, but Experian, Equifax, Fair Isaac Corp., and TransUnion all are incorporating in their scoring systems a broader array of payments. That can include rent, utilities, property liens and even criminal records.
The plus is that it makes credit more widely available to more people. The Big Three credit reporting agencies — Equifax, TransUnion and Experian — maintain credit reports on over 180 million Americans, about 83 percent of the adult population, according to the Federal Reserve.
That still leaves an estimated 35 million “not credit active,” according to Experian, and a lot of consumers that the lenders would like to turn into customers.
Difficulties remain before every bill we pay and transaction we make goes into some giant credit machine’s maw, with each on-time payment causing clanging bells of approval and gold stars by our names, each late one sending it into clacks in protest.
Gathering the data from a host of sources won’t be easy, and there are privacy and regulatory issues to overcome, according to a February 2008 discussion paper issued by the Federal Reserve Bank of Philadelphia’s Payment Cards Center. But the paper concludes, “While obstacles remain in moving toward incorporating alternative data into lending decisions by traditional financial institutions, there also seem to be real social and economic incentives for doing so.”
It’s almost the 15th of the month. Paid your rent yet?