Costa Mesa, Calif., Feb. 25, 2015 — New research studies from Experian, the leading global information services company, found 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. These studies then 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.
Unlike credit cards and mortgages, on-time and regular utility payments (with very few exceptions) are not included in an individual’s credit report. One of Experian’s newest studies — and the first it has published on this topic — titled Let there be light, found that by including these tradelines, 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 Experian study found that by including on-time utility payments in credit reports, there was nearly a 50 percent drop in subprime consumers with credit scores* between 300 and 600; a 54 percent increase in consumers considered nonprime with credit scores between 601 and 660; and a 15 percent increase in those with credit scores over 661, generally considered prime.
“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
percent drop in interest rates. The lower the consumer’s risk becomes, the lower the modeled interest rate, which leads to lower-cost credit for consumers.
“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 credit score model developer 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. It’s certainly a win-win for consumers and lenders alike.”
You can be too thin
The depth of a credit report reflects the number and types of accounts on file, and a thin file includes no more than four tradelines. Robust or diverse files show that a consumer is able to handle multiple, monthly payments. After including utility payments, the number of thick files (consumers with five or more tradelines) increased 9 percent. For consumers in the subprime risk segment who migrated from thin to thick file, the study showed they experienced nearly a 10 percent 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. “An increase in the credit file thickness alone, even with the risk segment remaining the same, can yield benefits such as lower credit card interest rates.”
Experian® was a pioneer and the first credit reporting agency to incorporate on-time rental payments in its database. In a separate study, entitled Credit for renting, Experian looked at the effect of adding positive rental housing payments to the credit report of subsidized-housing residents.
Prior to the simulated rent reporting in the study, 11 percent of these renters were considered no-hit, as they did not have a credit file. As a result of adding the positive rental tradelines, these same individuals now are scoreable and eight out of 10 of these former no-hit individuals had more than 12 months of rental payment history data in the Experian RentBureau database. These residents now would receive credit for not just one positive payment, but for months of responsible, on-time payments, and now would be able to leverage the existence of a credit file and build a credit history.
“Positive rental payments should be viewed as significant as timely mortgage payments,” Juillard added. “These individuals have a strong payment record, but it’s invisible to many companies looking at their credit profiles. Without any record of on-time payments, these individuals often pay a premium for services such as utilities, cable and telecommunications and often higher interest rates for other types of credit.”
Subprime and nonprime
Consumers with subprime scores between 300 and 600 typically receive fewer credit offers, higher interest rates on loans and credit cards, and overall limited access to credit. By adding rental data to their files, the number of consumers designated as subprime dropped nearly 20 percent and those in the nonprime risk segment increased by 92 percent.
“A recent college graduate who has limited credit history can benefit by having alternative payments such as rent or utilities included in his or her file, because it could bolster the report
enough so he or she could get a credit card, qualify for a loan or take advantage of other credit opportunities,” Magnotti added.
In the utilities/energy sector, Experian sampled a random set of consumers across the country who did not have any current reported utility payments. For this study, Experian looked at 25 months of positive payment history being added into consumers’ files prior to December 2013 and sourced the study sample from its own database. The average monthly balance associated with these positive payment obligations was approximately $114.
Experian’s EIRC for RevolvingSM product was used to model the credit card interest rate for the population of consumers in the modeled interest rate study. EIRC for Revolving is an estimated interest rate calculator for financial accounts that carry revolving balances from month to month – like credit cards. This product leverages historical credit card data to determine key information, such as the average effective annual percentage rates on a consumer’s credit cards.
For rental payment data, Experian looked at nearly 20,000 leases of subsidized-housing residents as reported by property management companies to Experian RentBureau. The leases in the study were added to the database as simulated tradelines. In many cases, Experian included approximately 25 months of rental history for the purpose of this analysis. Subsidized leases with negative rental payment history were excluded from this analysis.
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About Experian RentBureau
Experian® RentBureau® is the largest and most widely used database of rental payment information and currently includes information on more than 13 million residents nationwide. Property management companies and electronic rental payment processors report rental payment data directly and automatically to Experian RentBureau every 24 hours. This detailed rental payment information enables organizations to make better informed decisions. Property management companies utilize this data to screen new rental applicants’ payment history as part of their existing resident screening services. Experian is the first major credit reporting agency to incorporate positive rental payment data reported to Experian RentBureau in consumer credit reports, enabling residents to build credit history by paying rent responsibly.
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