CFPB Data Point: Becoming Credit Visible
June 2017
CFPB Data Point:
Becoming Credit Visible
The CFPB Office of Research
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Kenneth P. Brevoort
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Michelle Kambara
This is another in an occasional series of publications from the Consumer Financial
Protection Bureau¡¯s Office of Research. These publications are intended to further
the Bureau¡¯s objective of providing an evidence-based perspective on consumer
financial markets, consumer behavior, and regulations to inform the public discourse.
2
CFPB DATA POINT: BECOMING CREDIT VISIBLE
Table of Contents
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
2. Data and Empirical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
3. Entry Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. The Role of Co-Borrowers
4.1 Introduction . . . . . .
4.2 Joint Accounts . . . . .
4.3 Authorized Users . . .
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5. Changes Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.1 Changes in Time by Neighborhood Income Level . . . . . . . . . . 31
6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3
CFPB DATA POINT: BECOMING CREDIT VISIBLE
1. Introduction
In a previous Data Point, we estimated that 11 percent of adults in the United
States, or about 26 million people, are ¡°credit invisible,¡± meaning that they do not
have a credit record at one of the three nationwide credit reporting companies
(Brevoort, Grimm, and Kambara 2015). Without a credit record, lenders will have a
harder time assessing the creditworthiness of applicants. As a result, the credit
invisible may have a harder time accessing credit.
The problem of credit invisibility has been portrayed as a ¡°Catch-22¡± in which people
without credit histories are denied credit, which prevents them from acquiring a
credit history. Much of the effort to address the challenges faced by credit invisible
consumers has focused on identifying sources of alternative data (such as rent, cell
phone, or utility payments that are typically excluded from a traditional credit
report) that might be used to assess the creditworthiness of credit invisible
consumers, allow them to obtain credit, and help them transition out of credit
invisibility.
Yet despite the very real challenges the credit invisible face in obtaining credit,
millions of credit invisible consumers acquire credit records each year. Our earlier
Data Point estimated that about 9 percent of adults aged 25 to 29 were credit
invisible. Since no one is born with a credit record, and few have one before turning
18, this means that 91 percent of consumers in this age group acquired a credit
record before they turned 30. So while credit invisibility may be a Catch-22 for some,
others appear to make the transition.
4
CFPB DATA POINT: BECOMING CREDIT VISIBLE
In this Data Point, we build on our earlier work by exploring the means by which
consumers were able to transition out of credit invisibility. Using a sample of
de-identified credit records for over 1 million adults who made this transition, we
document the types of information that led to the creation of their credit records and
investigate how often these consumers may have relied on others (friends, family,
etc.), to serve as cosigners for loans or as account holders who can extend authorized
user status, to help them make this transition and also how often visibility is
achieved through a collection item or public record rather than as the result of a
loan. We also explore how these transitions differed across consumers of different
ages and across neighborhood income levels and how the transitions have changed in
recent years.
Like our earlier Data Point we use a fairly narrow definition of credit invisibility that
includes only consumers who lack a credit record at one of the nationwide credit
reporting companies. Other consumers, such as those who have records that cannot
be scored by most credit scoring models, may face similar problems in accessing
credit as the credit invisible but are excluded from this analysis. Furthermore, our
analysis focuses exclusively on how consumers acquire a credit record without regard
to whether it suggests they are a ¡°good¡± or ¡°bad¡± credit risk. We hope to investigate
what happens to consumers once they acquire a credit record in future research.
Key findings from this report include:
? Most consumers who transition out of credit invisibility do so at young ages. Of
the transitions out of credit invisibility that we observe in our sample, almost
80 percent occur before age 25. Consumers in low- and moderate-income
neighborhoods who make this transition do so at older ages than consumers in
middle- or upper-income neighborhoods.
? Across all age groups and income levels, credit cards trigger the creation of
consumer credit records more frequently than any other product. Student loans
are the next most frequent, though this almost entirely reflects the patterns of
young consumers. Consumers in lower-income neighborhoods are more likely
than consumers in higher-income neighborhoods to acquire a credit record from
non-loan items, such as third-party collection accounts or public records.
5
CFPB DATA POINT: BECOMING CREDIT VISIBLE
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