COSTA MESA, Calif.—A new study indicates that by adding on-time alternative payment data to credit report files, millions of consumers could gain access to basic financial services such as loans and credit cards.
The Experian report analyzed the financial benefits for consumers by adding positive monthly utility or rental payments to their credit reports and the subsequent effect on their overall access to credit, credit scores and risk profile.
The report found that by including trade lines, consumers could potentially benefit by having higher credit scores, lower interest rates, fuller credit histories and thicker credit files.
“Experian is committed to helping people establish credit and enhance their financial well-being,” said Genevieve Juillard, president of Experian’s consumer information services. “We have seen that incorporating new data sources into credit files is a positive step for consumers, and we’re happy that the public and private sectors are recognizing this with the Credit Access and Inclusion Act.”
The study found that by including on-time utility payments in credit reports, there was nearly a 50% drop in subprime consumers with credit scores between 300 and 600; a 54% increase in consumers considered nonprime with credit scores between 601 and 660; and a 15% increase in those with credit scores over 661.
“Since gas and electric services are used by just about every household in the country, including these positive payments in their credit files provides millions of Americans with a way to build their credit history,” said Juillard.
The study also found that by adding positive utility payments to their files, consumers moving from subprime to prime could see a dramatic 50% drop in interest rates.
“Many lenders require consumers to have thick files and clearly adding rent and utility payments to consumer credit files can improve their ability to access credit at reasonable rates,” said Barrett Burns, president and CEO of VantageScore Solutions. “That’s only half of the equation. The credit scoring model that a lender uses must be able to leverage this data and we knew early on the predictive value of this information. That’s why all VantageScore models include this information in the calculation of credit scores when it’s present in a consumer’s credit file.”
The report showed that after including utility payments, the number of thick files (consumers with five or more trade lines) increased 9%. For consumers in the subprime risk segment who migrated from thin to thick file, the study showed they experienced nearly a 10% drop in interest rates compared with their thin-file counterparts in the subprime category, who saw no change.
“While an individual’s credit score is important, the thickness of a credit file is also a critical factor in a lender’s decision,” said Chris Magnotti, strategic analytic consultant for Experian.