Down Debt

Using alternative data — like on-time lease payments — could help borrowers improve their credit scores

Monique Drayton in Washington, DC, had been living with bad credit for years. When she lost her full-time job, she said everything fell apart.

“Not having a good credit score is like being empty inside,” she said. “I didn’t feel valued.

But Drayton had a plan. In 2016, she and her two children moved into public housing with the intention of saving money and paying off debt.

For Americans like Drayton, who resort to paying by credit card after job loss, it can be difficult to bounce back from a negative credit score, even when their financial situation improves.

The credit score, which is based on things like credit card applications and the total amount of debt owed, can provide a limited view of a person’s finances.

Some academics believe that more data should be added to the score.

“What I would like to see is that we explore alternatives,” said Lindsay Sain Jones, assistant professor of legal studies at the University of Georgia Terry College of Business.

Sain-Jones said a more inclusive credit score could weigh payments more logically associated with a borrower’s credit risk.

“Things like utility payments, checking and savings account balances, account histories, rent payment histories,” she said.

In the United States, 44 million households rent their homes. If they pay their rent reliably, they don’t always have the advantage that this is reflected in their credit scores.

In 2020, Monique Drayton joined a DC Housing Authority program that aims to change that. Drayton said the program helped her refocus her mindset, getting her back “on the path” to home ownership.

Paying rent on time improved its score with all three major credit bureaus, TransUnion, Equifax and Experian.

Drayton gradually increased his credit score into the 700s, using those rent payments and disputing errors on his report. In May 2021, Drayton moved into her newly purchased home.

“I am living my dream. I am living my dream now,” she said.

The practice of rent declaration is spreading. Last month, Freddie Mac said consumers could use on-time lease payments to qualify for a mortgage. VantageScore notes that it includes rental data when available.

But including alternative data is still unusual in credit scores, and it’s not a solution to discrimination within the credit scoring system, said Pamela Foohey, a law professor at the Cardozo School of Law. from Yeshiva University.

“Alternative credit scores are high as a way to solve this problem,” Foohey said, adding that building more data as a solution misses a bigger point.

“It distracts from thinking about the larger disparities, both historical and current, that drive the traditional credit scoring system. It’s kind of like putting a bandage on something that’s a huge gaping wound,” she said.

Foohey thinks we need new economic policies, like guaranteeing certain loans or utility bills, to give marginalized communities who lack generational wealth a “boost.”

“Set them on the path to credit success,” she said. “And then credit scores themselves will reflect more of people’s relative ability to pay in the future.”

National Consumer Law Center attorney Chi Chi Wu said there was a promise to include alternative data in credit scores – with safeguards.

“Reporting of rents and utilities should be done in such a way as to report only positive information, and that they are done only with the voluntary acceptance and informed consent of the tenant or consumers,” a- she declared.

Wu said it was important that adding more financial data did not endanger consumer privacy.

As we know, more data means more power.

Professor Pamela Foohey has an article on alternative data and its drawbacks. We also have to credit Sain Jones’ analysis (co-authored) on the use of ‘fringe’ data, like how someone uses social media, as a way to determine creditworthiness.

Sounds a bit like that episode of “Black Mirror”, doesn’t it?

And, as Sasha mentioned, Freddie Mac is including lease payments in time for subscription, starting July 10, less than a year after Fannie Mae rolled out a similar proposal. These two government-sponsored companies, as they are called, underwrite most mortgages in the United States.

HousingWire has published an article about this which acknowledges the ability of Freddie Mac to “retrieve” proof of payment from apps such as Zelle, Venmo and PayPal, in case you pay your landlord over the phone rather than by check.

Besides the added rent, most medical debt is erased from credit reports. CNBC reports that all three credit bureaus now allow waived paid medical debt. These debts accounted for 58% of debts in collection and lingered on credit reports for up to seven years.

With the change, some consumers may see their scores increase sooner than expected.

For more, check out the rest of our coverage of the algorithms behind credit scores and how they can shape your financial life.