As the old saying goes, it takes money to make money. In personal finance, sometimes you need to borrow money in order to make an investment that can reap a larger reward. This can be having the ability to buy a computer that can help you further your education or get certain types of jobs, or it can be getting a mortgage to help you buy a house.
In order to get a loan, be it something like a mortgage or even the ability to borrow money short-term through a credit card, you have to have established a credit history. The easiest way to establish a credit history is by getting a credit card, but in order to get a credit card, many banks want you to already have a credit card--and at the very least, they want you to have a bank account.
Many people might think it's a no brainer to have a bank account. You might have grown up with parents who have checking and savings accounts, and they may have helped you establish those as well.
However, nearly 26 million Americans don't have bank accounts, and it's virtually impossible for them to build a credit history. These "unbanked" people lose out on the opportunities that a credit history affords them. Many times, this segment also contains people with lower incomes, and when they really need larger amounts of money, they're forced to turn to alternative lending options like payday loans that charge exorbitant interest rates and keep them from economic advancement.
The Consumer Financial Protection Bureau (CFPB) has announced that it's exploring ways that these 26 million--plus another 19 million people who have a "stale" credit history or one that doesn't have enough information to produce a viable credit score--can build their credit history and prove that they're worthy of obtaining loans. They're looking into whether or not data such as mobile phone bills and rent payments can give creditors enough information as to whether a consumer can be deemed a safe enough credit risk.
"Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources," said CFPB Director Richard Cordray in a statement. "We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible and how to minimize any risks in how this information is used."
There's no one general type of unbanked consumer. They can be young people trying to get credit. They can be divorced or widowed and don't have a strong enough credit history on their own. They can also be Black, Hispanic or recent immigrants. For whatever reason they're unbanked, that status presents a major barrier to advancement.
The CFPB wants to explore more unconventional sources of data to see if they can help this segment build their credit history to be able to get credit cards and standard types of loans, ultimately providing opportunity, as well as a way to get away from unfair lending products like payday loans.
The CFPB plans to explore different types of data sources, including certain types of bill payments and electronic transactions. The agency plans to look at whether these sources can build a viable enough of an argument for lenders to extend credit or bolster a low credit score. The agency also plans to assess the risks involved with using alternative data sources.
The CFPB will also look at how complex this makes the scoring and credit decision process for both consumers and lenders, how it will impact costs and services, how it impacts consumer privacy and security, and the impact it will have on certain groups or behaviors, such as those who move frequently for their careers or because of military service.
The CFPB is seeking comments on this topic through May 19.
