The development, which marks the first time U.S. consumers will be able to provide this data for their credit reports, is the latest in a number of changes that will likely increase credit scores for consumers who have low or no scores because they have a limited history of borrowing from banks and other mainstream lenders. The move could also help subprime borrowers whose scores are currently lower than what some lenders require.
The credit-reporting industry has been changing the way it does business in response to a mix of regulatory pressure and requests from banks and other lenders that want to make more loans to a wider swath of customers. Most lenders tightened standards dramatically, and have been in intense competition for the most creditworthy borrowers ever since. And while most large banks have limited appetite for the subprime borrowers they lent to in the runup to the financial crisis, some have been eyeing customers with thin borrowing histories as a new revenue stream, a sign the lenders believe the good economy still has room to run.
For example, Fair Isaac Corp., creator of the widely used FICO credit score, is close to launching a new credit score in partnership with Experian that will factor in consumers’ history managing their checking and savings accounts, which will give a boost to most consumers who keep at least several hundred dollars in their accounts and don’t overdraw.
All three major credit reporting firms—Experian, Equifax Inc. and TransUnion—have also been removing negative information like tax liens and judgments from consumers’ credit reports, in large part to appease regulators. Some of the changes, along with the improved economy, have helped increase credit scores in the U.S.
For the latest change, Experian CEO Brian Cassin said the company was approached by large banks that are looking for data to evaluate the risk of consumers with little to no borrowing histories. Experian has been working on the new methodology for about three years.
The new service, called Experian Boost, will be used by consumers who opt in and link the bank accounts they use to pay their phone and utility providers to Experian, allowing the company to track their monthly payments. Boost will also factor in landline-phone and cable-TV accounts. It won’t track missed payments.
Experian says approximately 46 million U.S. consumers with thin credit files at the firm, defined as those that have less than five loans or other accounts, could see their credit score increase instantly after the new data is added. About 1.5 million consumers with thin Experian credit files and no credit scores could receive a score. This could improve their chances of getting credit cards, personal loans and auto loans, because paying phone and utility providers consistently could be a sign that consumers will pay other bills as well.
Experian will add the new data to its consumer credit reports, and it will be taken into account in certain FICO score calculations. Experian will do the same with certain scores created by FICO competitor VantageScore Solutions LLC.
The industry’s efforts, though, could make shaky borrowers look better than they actually are. It is unclear how borrowers with limited credit histories will perform when unemployment begins to rise.
Jeff Softley, chief revenue officer at Experian Consumer Services, the business unit that handles direct-to-consumer products, said Experian has tested the new methodology and found it accurately predicts risk. “This is about access to credit—not expansion of credit,” he said.
For decades, credit reports and scores have mostly reflected a consumer’s history of paying loans like student debt and credit cards. Federal regulators, including the Consumer Financial Protection Bureau, have looked into the impacts of adding nonloan bill payments to lenders’ underwriting processes, and members of Congress ramped up calls for consumers to gain more power over their data at credit-reporting firms after the 2017 Equifax breach, when a massive hack exposed the personal data of millions of consumers.
The credit-reporting firms have already been collecting nonloan data on consumers for years, in addition to loan data. But that payment information has been added to only a small share of credit reports.
Experian will offer the new service as an option to consumers who sign up for its credit monitoring, identity-theft protection or other free or subscription-based services. Experian will compile the data with help from financial-technology firm Finicity.
If consumers stop paying their bills for three consecutive months from the accounts linked to Experian Boost, the company will delete that account from its credit report, which could undo the credit score increase. The consumer’s score will be recalculated without the additional account, which could cause their score to drop.
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