There are millions of Americans whose credit scores are low enough that they aren’t approved for credit cards, car loans and mortgages. What’s worse is that many of these same Americans had strong credit scores prior to the 2008 financial crisis and eventual recession. The foreclosures, job losses and other economic pressures kicked many out of the sector and that’s applicable to the growing number of unbanked and underbanked American consumers. That could soon change, though, for both consumers with bad credit or no credit.
As everyone knows, getting your credit history started as a young adult can be challenging. We’ve all been through it and know the “vicious cycle” it feels as though we’re in. We don’t have bad credit, but still struggle to get approved because we simply have no credit. Is it fair? Of course not – but it’s just one of those facts of life. Until now.
The three credit bureaus are working on new formulas that will mean more approvals. Traditional creditworthiness doesn’t always reveal a consumer’s willingness and resources to pay for that line of credit. Instead, it shows their past financial habits and as anyone who’s had financial struggles can tell you, it can be excruciating to rebuild that credit. The very accounts they were unable to pay for in the past might be easier to shoulder today. Whether it’s gained maturity, better job, or different life experiences, circumstances change – and with them, a consumer’s approach to his financial responsibilities.
One way this is being done is by offering a new method of determining a would – be creditor’s ability to pay by using what’s being referred to as “non-credit” expenses. These are those monthly obligations we all pay but aren’t reported to the credit bureaus – our utility bills, cell payments or rent. Two of the three big credit bureaus have already begun offering this to creditors as they seek to find ways of bringing “credit invisibibles” back into the credit pool. But they’re not the only ones.
American Express has a new family of prepaid debit cards. The credit card giant tracks these prepaid products and look for things like avoiding running the balance down to zero, consistent deposits made on the card and the general financial management habits of the card holders. After a specified period of time, the card company offers that card holder a more traditional credit card.
So why now? Why, all of a sudden, is the financial sector interested in wooing those will damaged or no credit histories? Those with marred reports have historically been avoided by banks and credit card companies; now, though, it’s actually the opposite: these same creditors are doing a lot to woo those consumers. The reason is actually quite simple: if the dynamics don’t change, these financial bodies simply won’t have the customer base to maintain their services. It’s to everyone’s advantage to approach the growing problem with a solution instead of excuses as to why it won’t work.
All of this looks great on paper but it’s not without problems. First, it’s not yet gone mainstream and no one is even sure that it could pan out, especially if the banks don’t buy into these new systems. Then, there’s the ongoing unemployment fiasco that has yet to level out, despite promises month after month that companies will “soon be hiring”. It really doesn’t matter how the bureaus are calculating scores and creditworthiness if consumers are out of work. There’s even a bill in the House that would change the Fair Credit Reporting Act, but even it has its sticking points, including accusations that it could be “inherently discriminatory”.
If the powers that be can work the wrinkles out of this new model, it could serve as the perfect vehicle for millions of American consumers to find their way back to some kind of financial security. Even if it’s still months or even a few years away, consumers can still opt for other financial products that can help too, including the American Express prepaid cards. With consistency in using the prepaid product, it could be the one credit card company that’s historically targeted affluent consumers just might be the saving grace for those who aren’t flush with cash and other assets. Aside from that, if consumers already have bank accounts, they might also approach their bank with a request to open a secured credit card using a savings account as collateral. Consumers need to understand that prepaid cards have no APR; however, secured credit cards do have an interest rate attached to them, so it stands to reason the American Express offer might be more viable for those looking to rebuild. There remains that one stumbling block, too: the lower the income of an applicant, the higher the odds that he will pay a higher interest rate. That too must change if the sector is to find some kind of balance, ideally even better than what was used prior to the 2008 fiasco.
According to a multi agency report conducted by FINRA Investor Education Foundation, Sallie Mae, TransUnion, Experion and U.S. Department of Housing, the average credit score in America is 693. These days, a lender often won’t go near an application for a mortgage with scores less than 750. Not only that, but only 39% of Americans know their credit scores and only 35% have requested a copy of their credit history in the past twelve months. It’s clear the time has come for better ways of keeping the American financial sector running. If not, we could soon be a country with a majority of consumers filling the role of “credit invisibles” and that serves no one’s purposes.
So what do you think of this new matrix solution? Is it an idea whose time has come or should things continue on the same course and wait out the financial difficulties on both Wall Street and Main Street? Join the conversation in our comments section or on our Facebook page.