They are invisible—53 million of them estimates Fair Isaac.  Some estimates even say as many as one in four rate invisibility, which would be about 80 million.  But then, how would anyone know for sure since they are invisible. Who are these invisible people? The majority are millennials, low-income households, ethnic minorities, and older consumers. The older consumers are surprising since either they have managed to stay invisible for many years or have become invisible.

What makes someone “invisible”? They are people who have no credit history or too “thin”  credit history to generate a credit report.  The credit bureaus don’t like that much and believe they should be able to provide a “service” to just about everyone.

What we’ll look at here is why these folks might be invisible.  Was it their choice, circumstances, or both?  What would make them visible.  And what problems they might encounter if they become visible and if their becoming visible would help us in deciding about doing business with a prospect.

To the credit reporting agencies, these 53 to 80 million invisible people are a problem.  After all, they say, the invisible don’t have access to all the services that require some kind of credit.  They can’t buy a car on credit, for example.  They may have trouble renting a home.  And they certainly can’t qualify for a standard, Fannie Mae mortgage.  To hear the credit reporting agencies tell it, the invisible must be living deprived lives.

In order for the invisibles to bulk up their credit files, the plan is to incorporate “alternative data,” information that is not included in traditional credit reports now, into all credit reports.  “For millions of people, it may not be alternative data but the only credit record they have.  For these consumers, it would seem it is primary data,” reported FICO in “What is ‘Alternative’ Credit Data?” in August 2012.

Included in “alternative data” are

1. public and institutional data such as educational history and professional licensing
2. property asset and ownership data such as home ownership, deed and appraisal sourced residence valuation, and recreational licensing
3. court sources derogatory items such as foreclosures, evictions, bankruptcies, and tax liens, and
4. economic health such as address instability and cost of living economic trajectory [where their income is and has been headed] (Lexis Nexus)

Also included will be utility and phone bills, items that are not reported to credit agencies unless they are egregiously past due and/or turned over to collection.

“Most of these sources don’t report to the traditional credit bureaus and aren’t included in commercial credit bureau scores.” (Lexis Nexus, “Alternative Data and Fair Lending” Aug. 2013)

Lexis Nexus says that to be scorable, consumers need a credit-data footprint by using the banking and credit system. So they are invisible because they are missing at least one of the following:

1. no recent activity on their credit;
2. no credit obligations open for long enough duration, or
3. only non-tradeline data (e.g., inquiry or public record) (Lexis Nexus)

How did these invisible people find themselves in this “unfortunate” situation?  Was it by choice or did circumstances create their situation?  One obvious group is millennials.  Financialbrand.com opined on Sept. 5, 2016 that “many millennials interact with their finances in a completely different way from previous generations and are living much of their financial lives through online services that offer streamlined processes that legacy financial institutions cannot provide.”  For example, they pay rent online through such services as Venmo. They have chosen that path simply because it is are less hassle than dealing with banks and financial institutions.

Another invisible group are the low-income.  They are disproportionately represented by minorities.  In fact, Lexis Nexus reports that 41 percent of minorities are “unscorable,” as compared with 24 percent of the overall population.   Why is that?  For many low-income it is circumstances.  I called my friend Mike Smith, a real estate investor, who sells properties on land sale contracts to people for whom regular mortgages are not an option.  I asked him what the reasons were for these folks avoiding the traditional banking and credit systems. He said some of it, maybe the majority was the result of illness, bad credit in the past, divorce, job loss, or “bad choices.”  The result was they got out of the notion of using credit and learned to get by paying cash and using payday lenders for cash.

Others are what he describes as “too immature.”  He reminded me that when we were growing up, we learned that when you make a deal, you stick to it.  Some folks don’t think that way. Sometimes the people who are undeserving of credit blame the lender or seller for their own inability to pay their debts, so they to teach the lender “a lesson” by refusing to pay any more on the debt.  As Mike pointed out, “they think they’re doing something good by not paying the bill.”  They think seller tricked them into buying something they couldn’t afford, which may have been the case, but these folks didn’t have the maturity to figure out that they couldn’t afford it in the first place.

Still other people take pride in not paying anyone.  They believe that anyone who is fool enough to trust them deserves to be stiffed.  Their credit files will most likely be invisible or starving-to-death thin.

As for older people, many of them are proud to pay cash for everything and don’t use credit.  I know when I was growing up, it was a badge of honor to pay cash for everything.  So if they pay cash, their credit file gets thinner and thinner eventually wasting away to invisibility.

One factor that correlates positively with credit reliability is length of time at a residence.  The longer the time living in one place or a consistent history of longer-term residence is a good predictor of a better bill-paying habits, and just so, a history of short-term residence is a good predictor of poor reliability in bill payment.

The big plan by the credit reporting agencies, then, is to add all this information to the traditional credit reports so that more people can get credit.  That’s a benefit to lenders and credit reporting agencies and those who check credit to decide whether to do business with someone.

What can some of the problems be? As an article in American Banker, June 11, 2016, by Chi Chi Wu asked, is the cure for credit invisibility better than the disease?  Certainly adding positive rental data might be an important step, but what about utility and telephone payments?  Many low-income people have problems paying their utility bills in the winter, so let them slide until the weather warms up ending up 30 to 60 days late. Late payments don’t get reported until they become several months past due. Since many localities have laws against turning off heat in the winter, the heat stays on.  However, if their consistent late payments show up on a credit report, it could well mean that the landlord, the employer or any other business person would refuse to rent, hire, or do business.

The problem with rental data is that it is hit and miss.  Most landlords don’t report rent payments to credit agencies unless they evict or they have figured out a way to report bad tenants.  What don’t  get reported as often, or at all, are on-time rent payments.  Certainly those tenants who pay their rent online can show consistent rent payments easily, such as those who live in larger apartment complexes.  But those renters who make their homes in single-family residences are a different story.  They live in properties self-managed by the rental owners and sometimes pay the rent in cash to the owner who may or may not provide a receipt.

The question is, do you want to or can you rely on alternative data as a judge of the quality of a prospect? Alternative data on can be of benefit to rental owners and managers if they selectively use data that predicts a prospect’s likelihood to pay rent on time. The most important consideration is why a particular person is “invisible.”  It can be for perfectly reasonable and non-credit-related reasons or it can be because that person should not be granted enough credit to rent a Barbie Playhouse.  The key is to winnow through the data to decide how well a prospect might perform.

By Robert L. Cain