I was thinking about this question recently for two reasons: 1) the $23 million fine that CFPB handed down to a few credit reporting agencies for deceptive marketing around credit scores and 2) As fewer millennials choose credit compared to debit, the number of credit invisibles increase. So, what can we learn from this article from the Atlantic (approximately 10 minutes in length)?

My notes:

• Chicken or the egg problem with credit: “If you think about the credit-invisible population in this country, their ability to enter the financial mainstream and access affordable credit instead of payday lenders and pawnshops and check-cashing services is tied to what’s in their credit report,” says Michael Turner, the president of the Policy and Economic Research Council. “They’re caught in the credit catch-22: In order to qualify for credit you have to have already had credit.”

• One potential solution: alternative data: “They are pushing for what is known as full-file credit reporting, which would allow landlords, utility companies, phone companies, and a host of others to report payments to credit agencies. This additional data, some say, would allow people to build healthy credit histories by doing what they are already doing—paying everyday bills. “This is a simple solution that won’t cost the government a penny, that builds on an existing framework, and can be implemented almost immediately,” Turner says. “I can’t think of a more gift-wrapped social and economic policy that should have broad bipartisan support.”

• Another expert in the industry believes government should take over the credit reporting responsibility: “Relying on private companies, he says, results in a system in which those who collect and disseminate information are more beholden to the financial sector than to borrowers, since that sector is their client. The government, he suggests, would have a more clear mandate to be accountable to borrowers, and upfront about their practices.”

Questions for your students:

• Do you think that alternative data would be helpful in establishing a credit score? Do you see any potential pitfalls with this approach?
• Spend 10 minutes researching customer feedback on the three credit reporting agencies (Equifax, Experian and TransUnion). Based on what you found, do you think the government should take over the credit reporting responsibility?
• What is one potential consequence of being a “credit invisible?”
• Did this article change how you think about credit scores? How?

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Check out this NGPF Case Study: Gimme Some Credit where students learn about alternative ways to establish a credit history.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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