What's the Story with "Emerging" or "Unbanked" Credit Scores?

Every six months or so, a new credit score option gets talked up in a press release. The new scores purport to solve the problem not being able to consumers without credit cards or loan accounts by evaluating payment history on rent and utility payments. More than 50 million consumers fit in to this category, so it's a potential ripe market.

Unfortunately, these programs rarely seem to take hold. The problem with so many innovations in the credit industry is that they aren't put into practice by the industry. Anyone can make a credit score, the trick is to get it to be used by banks and adopted as an industry standard. 

Here's a quick summary of a couple of the companies with these initiatives:

FICO Expansion Score - This one actually has some legs. The established credit scoring company launched this score a few years ago. It evaluates non-bureau data through ScoreNet, things like checking account records, payment plans and payday loans.  It uses the same 300-850 scale and has the FICO name, making it a bit friendlier for banks to plug into their underwriting systems.

Experian Emerging Score - This is the latest offering from Experian and uses data from a company called eBureau (formerly xTech) that tracks payment programs and other small accounts. It was just announced this month.

PRBC - This company has been touting themselves as a great way to build credit...but there are some big holes in their plans. Not only does the company charge consumers to "build" their credit file, the information is self reported and only minimally verified. Consumers aren't like to go through all this trouble to report negative records and late payments, so the company is skipping the information that lenders really want. They use the FICO Expansion score.

There are numerous other companies and scoring models out there trying to do the same thing (if you have one in particular you'd like more info on, send us an email). But until the systems gets more established and banks actually using these analytics, they're not likely to revolutionize lending.  The recent credit crunch has made banks especially skittish about anyone below traditional prime (700+ FICO) and probably set this back a bit.

One more point: these expansion programs aren't combined with the standard credit bureau data. If you qualify for a traditional credit score based on Equifax, Experian or TransUnion data, you're not going to have an expansion score used for your application. This isolates the data used for unbanked customers from the "real" credit data, making it a little unfair for both sides since they're being evaluated with different rulers. A smarter industry move would be for the big bureaus to start working with a wider net of financial companies to augment their data.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Comments

[Corey Stone]

Dear Ms. Davidson,
Thank you for covering the rapidly changing field of "emerging market" scores and data sources. PRBC obtains data on consumers via multiple channels, many of which are free to the consumer, including the bill payment services offered through their banks and credit unions. We do accept self-reported data (for free) but will only activate it in a consumer's file after we've verified it (for which we charge a fee). These verifications are far from minimal; in fact, PRBC announced an upgrade last week to the verification procedures we've developed in partnership with the NationalCredit Reporting Association and which we regard as industry best practices (covered in last Wednesday's American Banker).
PRBC's mission is to enable consumers to document positive payment histories that billers don't report to the main bureaus; unfortunately this includes most monthly household bills, including utilities, phone, wireless, cable, ISP, and rent. We're in complete agreement with you that alternative data sources such as ours and scores derived from them can be used most effectively and fairly when they incorporate standard credit data. In fact, most of the mortgage and car loan underwriting decisions in which our data get used also take the standard data into account, though only where there's a "thin file." We'd like to see the data, and the new scoring models, used more broadly and incorporate standard data from thin and fat files alike.
We'd welcome an opportunity to share with you how we're working to deepen the quality and availability of bill payment history and broaden its use in credit decisions.

Sincerely,
Corey Stone, CEO
PRBC (www.prbc.com)