3 ways lenders can evaluate credit invisibles

Learn how lenders can use alternative data sources to evaluate people without enough credit history to generate a credit score.

January 12, 2023

Tom Sullivan Pic
Tom Sullivan

Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.

Millions Americans have little to no access to credit. One of the main reasons for this is the fact that they don’t have a credit score or have thin credit files. 

Of the 49 million people who don’t have a credit score, 28 million are “credit invisible” and 21 million are “credit unscorable”. These are people that may be in good financial standing but because they haven’t applied for credit cards or taken out much debt, credit reporting agencies aren’t able to evaluate them—and neither can the lenders who rely on those credit scores.

For borrowers that don’t have a credit score or only have a thin credit file, there are alternative ways to evaluate their creditworthiness. In this article, we’ll examine what it means to be credit invisible, how it affects people, and how lenders can more fairly evaluate people without a credit history.

What does credit invisible mean?

Credit invisible means that a person is “invisible” to the three major nationwide credit reporting agencies (NCRAs): Experian, Equifax, and TransUnion. When a consumer takes out their first credit card or loan, it is reported to these three agencies and they begin the process of building their credit score and history. “Credit invisible” people have either never taken an action that’s been reported to these agencies or have taken too few actions to generate a credit score. 

Because these people don’t have a sufficient credit history or credit score, it is hard or impossible for them to qualify for loans such as auto loans, mortgages, or credit cards. If they do qualify, it is often at a much higher interest rate than those with robust credit histories. 

The CFPB puts people with insufficient credit history into three groups:

  1. Credit invisibles: People with zero NCRA credit records. They have never taken out a reportable loan or credit card.

  2. Insufficient unscored (thin credit file): People with some NCRA credit records, but not enough to generate a credit score. This often happens when a consumer has too few accounts or only recently opened accounts, and is also known as having a “thin credit file”. 

  3. Stale unscored: People that are credit ‘stale’, i.e. they have not had any reported any credit activity in a long time. 

All of these groups don’t have enough credit history to generate a credit score. They will face the same troubles when applying to obtain any form of conventional credit.

Age and income strongly correlate with the percentage of the population that is credit invisible or unscored. Younger adults are more likely to not have a credit score, and the same goes for those with low incomes (see below).

Recent US immigrants also have a hard time gaining access to credit as most lenders require a credit score, which they don’t yet have. 49% of recent immigrants say a US credit card is difficult to obtain. 

Some fintech companies are stepping up to fill this gap and extend credit to this group. Fintech startup Petal uses cash flow underwriting to offer credit to recent immigrants. Instead of asking for a credit score, they look at income and spending to determine creditworthiness. 

How does insufficient credit history affect people?

Having an insufficient credit history affects people mainly through reduced access to credit. Because they have no credit score or a thin history, lenders view these potential borrowers  as risky and are unlikely to provide loans in certain circumstances, such as access to a credit card or a small business loan.

Without the ability to access credit, it can be harder for credit invisibles to build wealth through real estate or starting a business. However, having no credit is not the same as having ‘bad credit’. 

People with low credit scores (300-579) will have a harder time qualifying for loans than people with no credit scores. In fact, having a low credit score can even prevent people from getting jobs or renting an apartment, making it harder to bounce back after a difficult time.

Fortunately, there are helpful ways for consumers to build or rebuild their credit. Most can obtain their first credit card, usually with a small limit on a secured line of credit. They can also find ways to qualify for auto loans and start the process of building credit. 

New technology is also helping more people build credit scores for the first time. Many fintech lenders are stepping up to the plate to expand financial access to people with little to no credit history—and close the financial health gap between those with credit and those without. There are even services people can sign up for that report their rent payments to credit reporting agencies and count them toward credit scores.

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Why do millions have a thin credit file or no credit history?

The reason millions of people don’t have a credit score is mostly that they’ve never opened a traditional credit card or obtained a conventional loan, but other factors contribute as well. 

Some loan types don’t help people build credit

Many low-income people that don’t have a credit score end up turning to higher interest rate loans, such as payday loans. Payday lenders generally do not report to credit reporting agencies unless the loan isn’t paid back and ends up with a debt collection agency. Therefore, a payday loan can only hurt a credit score and not improve it. Those that frequently turn to these lenders are getting hurt twice: once with high interest rates and again by not getting a chance to build credit.

Another common and fairly new loan type, buy now pay later (BNPL), is tricky because they're treated differently in credit reporting by each of the bureaus. That’s because to account for BNPL loans on a credit score, credit bureaus have to adapt their inputs, attributes, and credit scoring models and lenders have to update their algorithms to account for the changes. On top of that, not all BNPL lenders are reporting loans to credit bureaus to begin with. While some of these loans are reported, consumers can’t reliably use them to build up their credit score if they aren’t certain which loans actually count. 

Non-credit bill payments don’t count

Despite the fact that they are paid over regular intervals and show an individual's ability to handle their finances responsibly, bill payments such as rent, utilities, phone, and internet do not always count towards credit scores. There has been some improvement in this area in recent years, as programs such as Fannie Mae’s Positive Rent Payments have enabled underwriters to start counting a borrower’s rent payments towards mortgage loan qualification. 

However, the reality is that the majority of bill payments still aren’t reporting to credit agencies, making it a missed opportunity to build credit despite the financial responsibility making these payments shows.

Many unbanked and underbanked don’t have access to credit

In 2021, 6% of US adults were unbanked, meaning that they didn’t have access to a bank account. Another 13% were underbanked, which means they had a bank account but instead of using it, they relied more on check cashing services and payday loans. 

Given that gaining access to a credit card or conventional loan requires a bank account in good standing, it’s unlikely that the 19% of unbanked and underbanked people in the US have a credit score. 

Younger people can have a hard time building credit

Up until the early 2000s, it was relatively easy for college students and people under 21 to get their first credit card and start building credit. However, in order to protect vulnerable young consumers from high-interest debt, Congress passed the federal Credit CARD Act in 2009. 

The CARD Act prohibited financial institutions from providing unsecured credit cards to people under 21 without an adult cosigner or proof of income. While providing worthwhile protections against costly debt, this law made it more difficult for young people to start building credit—likely contributing to a higher percentage of young people without credit history.

How can lenders evaluate credit invisibles? Three types of data to use

When evaluating credit invisibles, lenders can go beyond the traditional credit score by looking at alternative data sources to determine creditworthiness. Instead of looking at credit history, they can review things like bank statements, balance history, rent payments, utility payments, and multiple sources of income streams. 

Using these alternative sources can give them a more robust picture of a borrower’s financial standing than a credit score alone—and they may want to include these sources for people who have a healthy credit score as well. 

Specifically, three data sources lenders can use to evaluate people without credit scores include:

1. Payment histories

When a borrower has been consistently making their bill payments on time for non-credit related bills, it shows that they are likely to make their loan or credit card payments on time as well. Payment history data can include:

  • Utility bills

  • Rent payments

  • Phone and internet bills

  • Loan payments towards new types of loans, like Buy Now Pay Later (BNPL)

  • Child care bills

2. Asset ownership

Showing a healthy account balance over time is another way of indicating that a borrower will be likely to have enough funds to make credit card or loan payments. To examine this, lenders can look at bank account balances and transaction histories over time. 

→ Want to verify transaction history, account balance, and account ownership faster? Plaid’s asset verification APIs instantly provide an up-to-date view of a borrower’s bank accounts and assets.

3. Income data

Lenders can also use a healthy and consistent income over time as a way to show that a borrower is likely to be able to make their payments on time. Documents that lenders can use to obtain the income data they need include:

  • Income deposited into a consumer’s bank account, including paychecks and/or direct deposits from employers, as well as gig economy work

  • Payroll data from payroll services like ADP

  • Documents that prove income such as w2s, 1099s, and paystubs

→ Want to verify borrowers’ income and employment faster? Plaid’s Income APIs provide robust data pulls for employment and income verification in seconds.

Plaid’s mission is ‘Unlock financial freedom for everyone’. One of the ways we further this mission is by providing API-based products that make it easier for lenders to use alternative data to evaluate borrowers without credit scores. 

With Plaid’s APIs, lenders can instantly get a robust picture of a borrower's assets and income straight from data sources like payroll systems and bank accounts. This enables them to go beyond the credit score to determine creditworthiness, get a more holistic view of a borrower’s finances, expand access to credit, and provide loans to more people who deserve it (even if they don’t have a credit score).

Evaluating credit invisibles promotes financial freedom and inclusion

By using data that hasn’t been reported to credit bureaus to evaluate a borrower’s creditworthiness, lenders can promote financial inclusion for people who have historically lacked access to credit and loans. Credit-invisible Americans—who are mostly young or low-income—can be given a more fair shot at building wealth, owning a home, or even buying a car at a lower interest rate. 

Extending credit to those without credit scores—when done intelligently and with data such as income, assets, and payment history—is also a lucrative business opportunity. This is a market that has a large number of people needing to be served, mainly those who have been left out of the traditional financial system. In fact, some have called serving the underbanked the next trillion-dollar opportunity in fintech. 

Fairly evaluating people without credit scores gives banks and other lenders the chance to further their own missions to close historical financial access gaps and give more people the financial freedom and opportunity they deserve.

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