Tens of millions of American consumers are either “credit thin” or “credit invisible” — without enough credit history, or any, for a lender to evaluate. As a result, many are paying higher interest rates for access to credit, if they can obtain it at all. Others need to rely on options such as payday lenders and cash advances.
This has been a problem the lending industry and its regulators have talked about for a long time, but it’s time to do more than talk. This issue can be addressed collectively, and needs to be tackled now.
Millennial Generation Faces Tougher Credit Road
Millennials are now the largest generation in the U.S. They have come of credit age and are poised to shape the economic landscape in the years to come. In fact, in this new decade, Millennials will make up nearly 60% of the workforce, and they already account for about 21% of the discretionary spending among U.S. consumers. Those percentages will only grow.
However, Millennials also make up a significant percentage of “thin file” consumers and they carry an average credit score of 647 — significantly lower than the national average of 682. Early data suggests that Generation Z is following a similar path. The country can’t keep going down this road.
How did we get here? Five years ago, less than 50% of the youngest Millennials had established credit, down from 80% for the same age group in 2006. While conditions have improved as Millennials have come of age, significant gaps in creditworthiness remain.
Unprecedented financial burdens like student debt and behavioral changes stemming from the economic crisis of 2008 have played a factor. This includes a distrust Millennials have developed of traditional financial institutions.
In fact, an Experian study found that 71% of Millennials would rather go to the dentist than listen to what a bank had to say.
But we know Millennials also approach credit very differently. The majority maintain their savings in cash. Most choose to have only one or two credit cards.
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New Ideas Can Help Meet Credit Eligibility Challenges
The status quo isn’t working for this generation. The credit industry’s players need to think differently — disruptively. Helping Millennials will require the efforts of many kinds of organizations. Lenders, tech and fintech companies, and consumer-credit-related businesses all bear a responsibility to help with the transformation needed.
Over the last year, we have heard much discussion about expanded Fair Credit Reporting Act data, sometimes called alternative credit data, a set of solutions that might help determine the creditworthiness of those currently being excluded from fully participating in the credit economy. Expanded FCRA data can range from utility bills to rental payments. Some institutions are offering concrete solutions that consumers and lenders can take advantage of today. More of this is needed.
Lenders will have an important role to play, as will solutions being developed by emerging fintech companies. But any solution created needs to engage Millennials (and very quickly Generation Z) directly, while giving them control of their own credit future.
Financial institutions have a special role to play in developing meaningful solutions to help address this economic challenge. The economy requires innovative solutions that allow relevant data to instantly go on a credit report and make an impact, enabling Millennials to take control of their own credit futures and overall financial health. Incorporating more information is a win, win. Good lending decisions for credit cards, auto loans and mortgages mean fewer defaults. Fewer defaults mean lower costs of credit for consumers and greater availability of consumer credit across the economy.
These solutions enable more people to be active and responsible participants in the credit economy and give people access to the credit they deserve. Financial education will also play a role but developing practical alternative data solutions that promote greater financial inclusion and participation must be the industry’s focus.
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Fresh Solutions Need to Be Developed in the Next Few Years
The new decade will require all players to address the challenge of thin file and credit invisible consumers. The next wave of solutions — for both lenders and consumers — will drive consumer empowerment and financial health for all. Policymakers will have a role to play here too, but that needn’t be through new legislation or changes in regulatory policy. Rather, legislators can use their influence to encourage and facilitate greater use and adoption of new technologies.
For the credit industry’s part, companies need to ensure that consumer information is permission-based, and that data is collected and managed in transparent and highly secure ways.