Consumer Credit: The Good, the Bad and the Invisible

“Credit Invisibles” is a term coined by the CFPB to describe consumers who do not have enough credit history for a credit score.

Banks and other financial institutions are always looking for ways to acquire more customers and grow their businesses. The right information can allow you to approve more loans, increase average loan sizes, and reduce charge-offs. Unfortunately, the banks’ customary approval process leaves money on the table.

The largest and fastest-growing consumer segment does not fit into the traditional landscape of consumer finance. Today, about 56 percent* of the population struggles to find reasonably-priced, short-term loans because they appear risky or even invisible to traditional credit bureaus and lenders.

Where did these consumers come from and how did they get here?

One simple explanation is that some consumers have made poor financial decisions and mismanaged their credit. However, there is a larger segment of the population that has a different story. Whether you call them underbanked, prior prime or subprime, many of these consumers represent a valuable source of revenue without increased risk.

Prior to the 2008-2009 financial crisis, many consumers were considered prime and slipped below the cutoff when credit underwriting requirements for traditional lenders tightened.

Emerging Populations

Another group included in this segment is the millennial population. Many millennials are emerging from college and have limited or no credit history (thin file / no file). They are turning to alternative financial services either because they can’t access traditional lines of credit, or they prefer not to. Millennials feel most comfortable in the digital world – a world that many traditional financial institutions haven’t completely embraced. The ease and speed with which they can secure an online loan is appealing, despite the extra fees to do so.

56% of the population struggles to find reasonably priced short-term loans.

Recent immigrants also fall into the thin file /no file category. In most cases, the lack of previous credit information does not automatically indicate a high-risk applicant, though many financial institutions treat it as such.

Can lenders tap into this underserved market and still manage risk? It’s possible with Clarity’s solutions!

* CFED Assets and Opportunity Scorecard. (2015). Excluded From the Financial Mainstream: How the Economic Recovery Is Bypassing Millions of Americans