How ‘Alternative Data’ Can Help More Americans Access Credit

TransUnion’s Hilary Chidi explains why paying rent, utilities and phone bills on time should be among the ways consumers can build their credit histories

By Rachel Goldberg

An estimated 60 million people in the United States are credit disadvantaged, which means they have no or sparse credit histories. That might be because they’ve never bought a house or a car or had a credit card, or because they haven’t done those things in recent years.

Having access to credit allows people to participate in the economy more fully. Opening those doors for more people will be especially important as we collectively recover from the economic and health impacts of the COVID-19 pandemic. The more data we can include in credit reports, the more we can reach the goal of financial inclusion.

I sat down with TransUnion Executive Vice President, Head of Global Credit Risk and Chief Sustainability Officer Hilary Chidi to discuss what it means to be credit disadvantaged and how “alternative data” like on-time rental, utility and phone payments could enable more Americans to achieve financial opportunity.

Rachel: Who are the credit disadvantaged? And what does that mean for TransUnion?

Hilary: Tens of millions of Americans do not have substantial credit histories. They don’t have profiles and scores that would allow them to access mortgages, auto loans and the credit products that prime borrowers can get. They are not able to participate in commerce in the way that many Americans take for granted. That’s a huge loss for the economy, for businesses and lenders, and, most importantly, for the consumer.

An adult American becomes “unscorable” because their credit history is too sparse. They may be a new immigrant to the country who has not been engaged in credit activity. Or they may belong to a younger generation of adults who don’t use credit as actively. You’ll find credit disadvantaged people across demographic groups and income levels. But lower-income and younger Americans are more likely to fall into the unscorable category.

Rachel: Why is that?

Hilary: To some degree younger consumers have always been new to credit. People grow up, leave their parents’ homes, maybe pursue higher education or join the workforce, and begin building lives. That’s not a new pattern. But what has changed is that the youngest segments of Americans, such as Millennials and Gen Z-ers, are a little more wary of credit than previous generations at a similar life stage. They’re also less well-off than previous generations. Compared to young adults in 1996, today’s generation is one-third poorer. A lot has to do with the high cost of housing and education as well as stagnant wages. So, it’s not much of a surprise that these young adults are more tentative than their parents about embarking on their financial lives and starting the credit-building process.

But this restraint has repercussions when they need credit, as many of them will want to buy a car to get to a job, or buy a home for a growing family, or start a business. For many, not having an adequate credit history becomes a significant impediment to living their lives.

Rachel: So, what’s the solution?

Hilary: The question becomes “What can we do to bring tens of millions of Americans who are credit disadvantaged into the process effectively ?”

I have a lot of friends and family who are renters. There are almost 46 million renter households in the country. Nearly two-thirds are 35-year-olds and younger. Rent generally consumes a large proportion of income. Yet for most renters who pay rent on time, there’s no reflection of that positive financial history on traditional credit reports.

TransUnion’s VantageScore credit-risk scoring model has long been able to use rental payment as part of the calculation of credit scores. It’s not just the previously unscorable consumers who benefit. Many people with subprime or near prime credit scores have better scores when rental data is included. And that means they’ll be able to have access to higher quality credit products, perhaps with cheaper interest rates, and be able to save a little bit more.

Rachel: Why isn’t alternative data like rental and utility payments being used more widely in credit reporting?

Hilary: A few things need to happen. We need more robust reporting policies and procedures. Fewer than 10% of property managers currently report rent payment to the credit bureaus. State and federal legislation could change that. California’s SB1157, which went into effect this month, requires landlords of subsidized housing with more than 15 units to give tenants the option of having their on-time rental payments reported to at least one credit bureau. Colorado recently approved similar legislation. We hope other states will follow suit.

Property managers and landlords of market-rate housing could make this a selling point: “Come live here and, if you choose, we will help you build credit.”

Credit bureaus like us have a role to play, too. We need to enhance the data-furnishing infrastructure so rental managers can efficiently, safely and inexpensively contribute data. TransUnion has been a proponent of this for a long time, and we have a great furnishing mechanism for our partners.

Tenants and tenants’ rights advocates need to seize initiative, too. Reporting alternative data is an important step the nation can take to drive financial inclusion.

Rachel: What does success look like for you? When will your work in this space be done?

Hilary: Success will be bringing access to the credit ecosystem to more Americans. We have tens of millions of people who are unscorable. When we’re able to bring access to high quality financial and credit products to a large proportion of that population, I will consider it my definition of success.

Many Americans, because of circumstances that are out of their control, are not able to begin building healthy credit profiles. Providing a mechanism for them to begin the process is something I hold very dear. It’s a core part of TU’s mission.

TransUnion is a global information and insights company that makes trust possible between businesses and consumers.