4 reasons why your customers have insufficient credit histories
Whenever you come across customers with insufficient credit history, nine times out of 10, you show them the door. Even if you have a hunch that someone may be financially responsible, you just can't take the risk of lending to them.
You've probably wondered why these individuals have low or no credit history. Here are four reasons why some of your customers may not have a lot of credit information:
1. They're new to the country
Traditional credit reports don't consider information from other countries. So, even if an immigrant paid loans and owned credit cards abroad, FICO won't take that data into account. They may tell you that they've paid off loans in their home countries, but there's no way for you to confirm they did.
"63% of people between the ages of 18 and 29 don't even own a credit card."
NerdWallet wrote a story about an Indian immigrant who had good employment history and demonstrated strong creditworthiness overseas. However, when she moved to the U.S. to pursue her master's degree, she realized she couldn't open a debit account at a U.S. bank because her positive credit history didn't follow her to America.
2. They're millennials
Generation Y has to deal with quite a few stereotypes, but there is some truth to the assumption that they have insufficient credit history. You'd think that millennials spend without restraint, using credit cards left and right, but the fact of the matter is that few actually own credit cards. According to a study from Bankrate, 63 percent of people between the ages of 18 and 29 don't even own a credit card. David Pommerehn, senior counsel at the Consumer Bankers Association, told Bankrate that most millennials are apprehensive of carrying debt. Therefore, they're unlikely to have sizeable credit histories lenders can reference.
"[Millennials] grew up in a world where the economy was tanking," said Pommerehn. "There was great concern about jobs and debts and paying off bills."
"30% of people in lower-income brackets are credit invisible."
3. They're lower-income individuals
Statistically, people living in low-income neighborhoods are more likely to have thin-file or no-file credit histories than those residing in more affluent neighborhoods. A study from the Consumer Financial Protection Bureau found 30 percent of people in lower-income brackets are credit invisible. Another 15 percent of such consumers have credit records, but the data within those accounts isn't scored.
4. They're new to the job market
Young adults are more likely to have insufficient credit histories than those who have been working for some time. For example, more than 80 percent of 18- and 19-year-olds are either credit invisible or do not have enough data to produce a credit score, according to the CFPB. In addition, 20 percent of those between the ages of 20 and 24 are credit invisible.
Alright, how do you reach people with insufficient credit histories? Inform them of alternative credit reports, which gather information such as utility bill and rent payment habits. These reports will provide you with some context when assessing thin-file or no-file borrowers' ability to repay. Click here to read more about how alternative credit reports work.