PDF CFPB Data Point: Becoming Credit Visible

June 2017

CFPB Data Point: Becoming Credit Visible

The CFPB Office of Research

p Kenneth P. Brevoort p 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.

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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2 Joint Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3 Authorized Users . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5. Changes Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.1 Changes in Time by Neighborhood Income Level . . . . . . . . . . 31 6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

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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.

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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.

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