Securing a loan is rarely a straightforward process. No matter how big or small, the type or intended purpose of the loan, the lender must go through an underwriting process that includes evaluation financial information about the consumer. Most of the time, this includes pulling a credit report and analyzing the score.
The credit score can tell the lender some valuable information, like whether the person has a history of skipping payments or a habit of maxing out too many credit cards. These might be red flags that prompt a lender to deny a loan or charge a higher interest rate to make up for the risk of nonpayment.
But the credit scoring system is an imperfect model. People can't be boiled down to a simple three-digit number; they have real lives, responsibilities, jobs and families. There's more to them than a report compiled by a credit bureau.
Here are just a few concerns we have about credit scores that have influenced our choice to look beyond this factor and more closely at consumers as real people, not numbers:
If a credit report is one of the determining factors behind the terms of a loan, what happens when there is no report to pull? Oftentimes, the person gets turned down for the loan - there's simply not enough information for the lender to determine whether the customer is financially responsible enough to handle a loan.
"26 million Americans are considered "credit invisible."
Unfortunately, this is the case for 26 million people who are considered "credit invisible," according to the Consumer Financial Protection Bureau. This is when a person doesn't have any credit history records with any of the three major credit bureaus; this person probably has never taken out a loan or applied for a credit card.
Another 19 million people have an "unscorable" credit file. Either there is too little information to put into the credit reporting agencies' proprietary equations that gives other consumers their scores, or the information in the file is so old, it's barely relevant.
This means that nearly 20 percent of Americans don't have a credit score.
A person's entry product refers to the action they took that initially created their credit report. The most common entry product is a credit card, according to the Consumer Financial Protection Bureau: 37.6 percent of consumers' credit reports were first created with plastic.
However, there are plenty of other types of information that are included in credit reports, thus allowing credit reports to be created based on:
In a 2017 report analyzing consumer entry products, CFPB noted that it did not explicitly study whether entry product had a direct effect on eventual credit score. However, it's hard to ignore the trend: When people's entry products are traditional loan items (auto, home, student), their credit scores are generally higher. Those whose first marks were collections accounts and non-loan items generally had lower scores.
Let's look at why this might be.
Collections accounts are typically reported by third-party debt collectors and often include unpaid medical bills or delinquent cell phone or cable bills. Non-loan items could be late utility bills, child support payments or public records. Rarely do any of these things paint a pretty picture of the consumer's financial situation - no wonder these consumers' scores start off low.
The people who work at credit bureaus are prone to mistakes, just like anyone else. As such, it's not uncommon for people to find that their credit reports have incorrect information. Many times, it's a simple case of listing one Jane Smith's account on another Jane Smith's report, or failing to update account information like an increased credit limit on a card. Still, this can have a negative effect on the person's score, and therefore their ability to obtain credit.
According to a study from personal finance company LendEdu, there were 30,903 complaints of incorrect information being included on credit reports in 2016 alone. That's about 16.6 percent of all complaints submitted to the CFPB that year, and close to three-quarters of all credit reporting-related complaints.
The most common issue was the classic wrong person debacle: The information listed was simply not theirs. Other times, the status or terms of an account were wrong, or the consumer's personal information was errant.
Perhaps most concerning was the fact that 2,526 of the complaints addressed information that was previously deleted but reinserted. The process of removing incorrect information can be confusing and time-consuming, so it's important that consumers take the initiative to do this. But thousands of consumers' incorrect information being put back onto a credit report is discouraging, to say the least.
For many consumers, a credit report will have important insight into the person's money habits and current financial situation. It can help a lender determine how creditworthy the person is and provides a basis to determine how much, and at what rate, the person can reasonably afford to borrow.
However there are also plenty of cases when this strategy simply doesn't work.
It's for this reason that Aqua doesn't solely use credit scores to determine who can secure financing through your dealership. We look at the person as a human being; there's a lot of information that can be gleaned from evaluating their employment and how secure it is; their housing situation and how long they've lived there; their rent payments and whether they're made on time, and so much more.
By taking factors such as these into account, we're able to make smart decisions about who to extend financing to. As a result, businesses that partner with us find they're able to help more people in their community and perhaps truly enable a positive change for that person. Learn more about our financing programs by reaching out to Aqua Finance.