Opinion: It’s time to use alternative data to calculate creditworthiness

Today’s guest blogger, John Simpson, is CEO of RentReporters.

A credit score can negatively or positively affect so many aspects of life – from where people live to how much they pay and even if they get that dream job. And for those with no or a low credit score, life can become increasingly difficult, as they are denied access to financial products that those who are credit worthy take for granted.

These individuals fall into the categories of credit invisible and credit unscorable – and it’s a big problem that isn’t going away anytime soon. In fact, 26 million Americans are credit invisible and another 19 million are credit unscorable. That’s 45 million Americans living without access to credit.

The reality is that having no or a low credit score can happen to a variety of people – graduates on their own for the first time, immigrants to the United States, military personnel returning from overseas deployment, and men and women recently widowed or divorced. Chances are, we all know someone who falls into one of these categories.

The traditional model used to calculate credit scores no longer works in today’s world. It’s time to use alternative data – such as rental payments, child support, cash transactions, work salary and remittance history – to calculate credit worthiness.

Let’s look specifically at rental payments. Today, there are more than 100 million renters in the U.S., and their numbers are only increasing. In fact, according to the Joint Center for Housing Studies at Harvard University and its 2017 report The State of the Nation’s Housing, growth of renters continues to outpace homeownership. And for many of these individuals, paying rent is their largest, recurring monthly expense.

Paying monthly rent payments is highly correlated with the ability to repay debt in a timely manner. Yet, historically, these on-time rent payments have not been used to calculate consumer credit scores. That’s not right. Consumers should be rewarded for their responsible financial behavior, and for millions of Americans, that means paying their rent on time every month. It’s no different than paying on a home mortgage or car payment.

Renters who want to build and improve their credit score are not able to report rent payments on their own, but there are rent-reporting companies that can help consumers by reporting their on-time rent payments to the credit bureaus. The process is simple. The renter signs up for a service. Then the rent-reporting company verifies rent payments and then reports the payment to the credit bureaus. Your on-time rent payment is reported as a tradeline in your credit report, and with on-time, consistent rent payments your credit score can increase (assuming the scoring model being used factors in these tradelines).

When shopping around for a rent-reporting company, consumers should inquire about any fees to sign up for a service as well as which credit bureau their rent payments will be reported to – and this is important, as not all lenders pull the same score or go to the same credit bureau when checking an individual’s credit.

At RentReporters, we do this by reporting payments to TransUnion, and this rent-reporting data can then impact FICO 9 and Vantage 3.0 credit scores. Reporting on-time rent payments can also help add “thickness” to an individual’s credit file, which can be influential in lending decisions.

By using alternative data to calculate creditworthiness, the credit invisible and credit unscorable are provided with a viable path that enables them build and improve their credit scores. And for millions of Americans, that’s life changing.

Do you wish your rent payments were factored into your credit score?

Author bio

John Simpson has played an integral role in RentReporters since 2013, when he joined as an investor and Board Member. Compelled by the opportunity to provide our country’s 100 million renters, particularly the 40 million who are credit invisible, the ability to improve or establish credit by paying their rent on time, he expanded his role in 2016 to become CEO.

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