(CNN Business)For years, if you didn’t have a credit score it was extremely difficult to get an unsecured credit card or certain types of loans. But a new plan among some of the nation’s largest banks to share deposit and other checking and savings account information may help people without credit scores or traditional credit histories get approved.
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Over the past year, an independent agency within the US Treasury Department has been asking banks and others in the financial industry to devise ways to issue credit to people who lacked a credit score, which has long been the standard measure of creditworthiness in the lending industry.
In response, about 10 banks — including JPMorgan Chase (JPM), Wells Fargo (WFC)and U.S. Bancorp (USB) — have tentatively agreed to a plan to share non-traditional data, like bank account deposit and bill payment activity, to help qualify borrowers without traditional credit histories, according to the Wall Street Journal, which first reported on the program.
The push for financial institutions to come to a data sharing agreement came from the Roundtable for Economic Access and Change, or Project REACh, which is a program run by the Office of the Comptroller of the Currency. The project is designed to reduce barriers that prevent equal access to credit and capital.
Credit scores hit a record high. But US consumers are not OKThe OCC has confirmed there is a plan, but the details of the agreement among the banks still need to be worked out. Should the proposed arrangement go through, it would mean that if you don’t have a credit score but you have a bank account at Wells Fargo, for example, you can use that financial history to help you get a credit card with another bank, like JPMorgan Chase.Read More”This will give millions of Americans the opportunity to access credit that’s essential to building wealth — buying a home, starting a business, or financing education,” Trish Wexler, a spokesperson for JPMorgan Chase, told CNN Business. A spokesperson for Bank of America, a member of the working group, said that the bank is committed to financial inclusion and supports the objectives of Project REACh. Wells Fargo refrained from confirming or commenting further about the agreement. US Bancorp has not responded to a request for comment. There are currently 53 million people who have no credit score, according to the Fair Isaac Corporation, the creator of FICO credit scores. Such people, who are disproportionately lower income and people of color, face higher costs to borrowing because they are forced to turn to products like payday loans. Banks and lenders refer to those without credit history as “credit invisible.” This group can include people who are new to credit, like young people or recent immigrants, as well as people who haven’t used credit in a long time or who have lost their access to credit due to financial difficulties, according to FICO. Regardless of the reason for their lack of credit score, many people who are credit invisible have bank accounts and make regular recurring payments on rent or utilities. But that information is typically not included in a credit score. “It is nothing new to use bank account information to help make lending decisions for those with little or no credit, ” said Matt Schulz, chief industry analyst at LendingTree. “Banks have been doing that with their own deposit customers for years.”JPMorgan Chase, for example, has used this information to approve credit for about 700,000 of its own banking customers who don’t have a credit score over the past five years, according to the bank.”If you’re looking for a credit card, the banks where you have your account is often the best place to start because they know the most about you,” he said. “They are already using that information to make decisions about up selling you on other things they offer like car loans or mortgages.”
How to buy a home with no down paymentBut once the banks finalize the terms of the agreement, that information will be able to be shared beyond your own bank.Schulz said banks have been trying to figure out how to responsibly issue credit using alternative measures of creditworthiness for some time and that there could be a rising tide that lifts all boats aspect to this new agreement. Someone who has an account with one big bank may be inclined to get a credit card from another big bank, he said. But, he said, the rise of personal loans especially by online lenders has chipped away at the credit card space. “Some of this cooperation among the biggest banks may be a bit of reaction to smaller banks and fintech companies infringing on their space,” said Schulz.
This solution — sharing bank deposit data — is ideal for banks because it is a measure they are already comfortable with and have, in many cases, been using in-house already.”There is always risk when you’re opening up access to credit to people who haven’t had it before,” said Schulz. “But if you can do that by using information banks already know how to read and what to do with, you’re limiting the risk.”
Source: edition.cnn.com