According to the Federal Reserve, more than 50 million Americans have no credit score from big credit bureaus like Experian, Equifax, and TransUnion. Young people are often at a disadvantage in receiving loans because they have no credit history. Consequently, they find it difficult to get competitive interest rates. This is because minority groups often encounter these huge gaps in credit visibility. Approximately 26% of Hispanic consumers and 27% of Black consumers fall into the category of being credit invisible or unscorable. This is much higher than the 16% of White and Asian consumers that do so.
The larger implications of these eye-opening statistics are very troubling, especially for America’s renters. Over 90% of renters pay their housing cost on time but these regular payments usually do not get reported to credit bureaus. Because of this, millions of Americans lose out on opportunities to increase their credit scores. These scores are on a scale of 300 to 850. A higher credit score means a greater likelihood that you’ll pay your debts—including credit cards and mortgage loans—on time.
The Burden of Credit Invisibility
Credit invisibility disproportionately affects various demographic groups. Our research repeatedly demonstrates that immigrants overcome tremendous odds. Because they lack a robust U.S. credit history, their credit histories from their home countries often are not recognized in the U.S. credit system. This can freeze out millions from having crucial financial tools as soon as they land in the U.S.
Beyond immigrants, these numbers tell a disturbing story for our communities of color. Nearly one in four Hispanic and Black consumers are credit invisible. By comparison, a little more than one in six White and Asian consumers are stuck in the same place. These inequities underscore important systemic needs to be done within the financial market.
“When we came here, we didn’t have a credit score. We went to one of the biggest financial institutions to borrow money; we were turned away and had to go borrow from a predatory lender who wanted to lend at over 400% interest rate,” said Wemimo Abbey, co-founder of Esusu, a company focused on addressing these inequities.
The Importance of Reporting Rent Payments
Until then, millions of renters nationwide are unaware of the benefits rent payments can bring by being factored into their daily credit score. An estimated $5.3 trillion is still hiding out as unreported because there are no data trails from rent payments. The fiscal costs of this crisis are mind boggling. Commercially managed housing providers already have solutions in place and strong working relationships with the major credit reporting agencies. They often impose a fee to report your rent payments.
Fortunately, Esusu has gone a long way toward improving this environment. At first, only 10% of rent payments were reported to credit bureaus. Indeed, efforts to increase this paltry percentage are gaining momentum. We anticipate that payment records will be visible approximately 30 days after a payment is submitted. A few agencies provide a grace period for late payments. This provides renters with 30 days of leeway to make their rent payments without negatively impacting their credit score.
“We’re leaving over $5.3 trillion on the table, we’ve got to do better,” Abbey emphasized.
Awareness about this issue is expanding exponentially. As a result, demand for services like Esusu has increased greatly, driving the company to a recent $1 billion valuation.
Democratizing Access to Credit
Esusu’s vision is to democratize access to credit for those historically marginalized and excluded from traditional financial systems. In particular, the firm aims to serve people living in non-commercially owned, managed or maintained housing. These people typically cannot access established tools for developing their credit history.
Abbey noted the importance of expanding financial opportunities for all consumers, stating, “We have democratized access because you have a long tail of people who don’t live in commercially managed housing.” By reporting and recognizing on-time rent payments, people can improve their credit scores commensurately.