Did COVID kill the credit score? Some fintechs say it’s possible.
Your credit score might not matter as much the next time you apply for that next credit card or loan. At least that’s what some lenders and financial technology — or fintech — companies say at industry conference Fintech Nexus USA 2022. And that may be good news for most Americans.
“Ironically, during the pandemic, the average credit score rose around 12 points,” Colin Tran, vice president of corporate affairs at Credit Bureau+, tells Finder. But that bump isn’t expected to last. With the end of pandemic aid, inflation and an uptick in spending, things aren’t looking great for consumers. “You’re probably going to see a major crash in credit scores.”
Luckily, a dip in your credit score may not affect your ability to get a new loan or credit card as much as it has in the past. That’s because traditional scores like FICO and Vantage have been built to look at an applicant’s credit history over five years, according to Tran.
It’s stable, but not able to work with the volatility of the current market. “They haven’t seen any real data during the past two years of the pandemic,” Tran says.
Your credit score never showed the whole picture
Few if any lenders rely on credit scores alone when approving an application. Traditionally, lenders consider credit scores along with a slew of other factors that include your employment and banking history. But bad or no credit is often enough to automatically deny an application at a traditional bank.
The federal government has recognized this problem recently and launched the Roundtable for Economic Access and Change — more commonly known as Project REACh — in July 2020. A main goal of Project REACh is to create an alternative credit scoring method that federal regulators recognize as fair and safe. Currently, FICO and Vantage scores aren’t subject to regulation.
Nearly 50 million people in the US don’t have usable credit scores, according to the Office of the Comptroller of Currency, which oversees Project REACh. This disproportionately affects low-income and BIPOC Americans.
A year into Project REACh, 10 large banks announced plans to share data from consumer deposit accounts to help extend credit to customers who would have otherwise been denied for a credit card or loan. This will allow competitors to access data from their checking accounts and increase a borrower’s chances of getting approved, even without a credit score.
Yet financing remains inaccessible to a large swath of the population, which has led to a rise in companies like Credit Bureau+.
“The premise of Credit Bureau+ is that if you take a look at anyone in the subprime space, some of those people really should not be listed as subprime,” says Tran. “For example, I’m a recent graduate, so if I pull my credit score, I don’t have a file.”
Credit scores without borders
American Express is addressing the credit score problem with a slightly different approach. It partners with Nova Credit to target particularly valuable sector of no-credit borrowers: recent immigrants. Nova Credit works by connecting with credit bureaus in a borrower’s home country and presenting that information to lenders in the US.
“We live in a globalized world, and consumers expect that the data was global,” says Atul Ranjan, American Express vice president of new account underwriting and business development. Ranjan’s remarks came during the panel “Finance Without Borders: Enabling Financial Health for New Immigrants.”
“The reason why lenders wouldn’t approve them wasn’t because they were risky, but because there wasn’t the data.”
Ranjan’s personal experience informs his understanding of why this kind of access is so important. “I moved to the US almost 11 years ago, and when I moved it was super hard to get a postpaid connection,” he says. “It’s pretty frustrating for these consumers, because they expect that, because it was available to them in their own country.”
When will lenders ditch the credit score? Some already have
While many lenders responded to COVID-19 by increasing their credit score requirements, some fintechs took a different approach. Online lending platform Upstart, for example, lowered its minimum credit score from 620 to 600 in July 2020. It lowered it again to 580 in October of that year, before finally removing it altogether. They found they didn’t need it.
“Essentially, our models are great at predicting creditworthiness,” Upstart Senior Partnerships Manager Courtney Hamilton tells Finder. “Our platform looks at more than 1,600 variables when assessing risk. We’ve seen results that gave us confidence that we could predict the repayment ability.”
Rather than look at a borrower’s assets, Upstart’s model focuses on the future. Details about your education and working experience may matter more than, say, your housing status.
Newer lenders may also be more likely to skip over your FICO score than an established lender, according to Tran.
“We have some clients where they’re brand-new in the space, and we’re the first score that they’ve dealt with, and we’re 100% of their decision,” Tran says. But larger Credit Bureau+ clients only use it as a piece of the underwriting process. “If you look at big banks, they develop their own scores in-house.”
But what about privacy?
Expanding credit access may come with some downsides for consumers, including a lack of privacy. Lenders must rely on a much larger scale of data to sidestep traditional credit checks — at least for now.
“Wherever there was a documented transaction, we’re able to analyze those transactions to give a more holistic picture,” says Tran. “How do you borrow money without a credit score? The answer to that is to get that data from elsewhere.”
That may be a concern for some of the very borrowers these products were created for.
“Privacy and data means different things to different groups of people,” says Erin Coltrera, associate director of the Center for Guaranteed Income Research at University of Pennsylvania, speaking at the panel “Closing Wealth and Opportunity Gaps for Hourly Workers & Communities of Color.”
“Data can be leveraged against folks,” says Coltrera. When there’s a rise in white nationalism, for example, “data can be a really, really scary tool when it identifies you and makes you vulnerable to some form of attack.”
But consumers should weigh the risks of data sharing with the benefits of credit access. “We have to get away from some of the metrics that have structural racism baked into them,” Coltrera says. “There are so many proxies for race at this point,” that it’s easy to build these biases into the tools that lenders have traditionally used to approve borrowers.
Nearly half of people who are unbanked or underbanked have held bank accounts at some point, according to Coltrera. They aren’t afraid of banks, she says — they’re just not being served. And moving beyond traditional data like credit could help underserved individuals access credit.
“Certain groups are incentivized differently,” says Bonin Bough, cofounder & advisor at Lockstep Ventures, speaking during the same panel. “Very few people are afraid of giving away data. But the incentive isn’t there.”
Tran also points out that sharing your data with a lender that uses a service like Credit Bureau+ also won’t happen without your knowledge. “We don’t have access to that data until we have your consent.”
Self-sovereign identity could offer more privacy in the future
Fintech companies are working to reduce the amount of data that you need to share when you apply for a loan — or use any online financial product — thanks to technology called self-sovereign identity.
“When you have the self-sovereign identity and you’re decentralizing it,” says Tran, “you don’t have these honeypots of data stored at the bureaus. You have it on your phone.”
This means that you need to show the necessary pieces of identity one at a time. Tran uses the example of going to a bar: “If I’m going to get ID’d at the bar, they don’t need to know where I live, what my license number is. They only need to see that I am who I say am, and that I’m over 21.”
Self-sovereign identity, which stores every piece of data separately and individualized, would allow you to prove that you’re 21 without revealing anything else about yourself.
One of the main benefits of this is that it would make identity theft a lot more difficult. Hackers would have to hack individuals, instead of the batch hacking that’s common today.
So take the 2017 Equifax Data Breach as an example. A single data breach exposed the data of 147 million people. With self-sovereign identity, the hackers would have had to perform 147 million times the amount of work for the same results. “It’s no longer worth it to try,” Tran says.
Self-sovereign identity may not be available for a long time.
“The technology is ready,” Tran says. “Are people willing to change to that yet? Who knows?”
Tran predicts that it won’t be widely accepted for years. And by then, “the entire industry will be very different.”
How to find a lender that looks beyond FICO
For now, lenders that use alternative data may be the best bet if you’ve struggled to get approved for a loan or credit card. Yet you may need to ask what kind of data they use before you apply.
“A lot of lenders don’t advertise who they use,” says Tran. “But you can always ask what data they’re pulling from.”
Newer lenders in particular may be more willing than established banks to adapt new credit underwriting models. Especially those that use online underwriting.
But Tran also warns that consumers should do their due diligence before signing up with a new product: “Always avoid the predatory lenders. Look at the fees.”
Reading customer reviews on sites like the Better Business Bureau and Trustpilot can also give you a look at what the customer experience is like. And read the disclosures before you give your consent so that you understand the types of data you’re sharing.
“Unfortunately for the vast majority of lenders, they only look at your traditional file,” Tran says. But that may not be the case for long.
