Guest Post: Emerging Credit and the Future of Lending

The following is a guest post by Jonathan of Master Your Card blog; (RSS feed). This post is a little bit different from many of the posts I have on brip blap, but I thought it was an interesting concept worth talking about – attempts by the banking industry to start pushing consumer debt onto people who have intentionally avoided it.

As the effects of the mortgage meltdown ripple through the entire lending community, the result is higher interest rates and stricter guidelines on who qualifies for credit. In the wake of what could be termed as one of the most devastating credit meltdowns in the history of the United States, many empty-handed investors are searching for someone to pin the blame on. And it seems that they’ve fixed their sights upon the lofty, mysterious citadel of Fair Isaac Credit Organization.

Mortgage lenders are crying foul play on Fair Isaac, citing major flaws in the company’s popular FICO Classic credit scoring model as being the underlying cause for the economic disaster that has taken the United States by storm. What do these allegations mean for the credit industry, and more specifically, the credit card industry? Let’s take a look at a relatively new phenomenon in the world of credit scores: the so called “emerging credit” scoring models.

Emerging Credit scores are largely the result of a shrinking market in terms of the number of consumers who are considered creditworthy. As the mortgage crises escalates, people who used to be considered an acceptable risk to creditors are no longer eligible for even the most basic of credit cards; but these companies still need to make money somehow, so where do they turn to market their credit products if the old crowd just isn’t going to “make the cut” anymore? The answer is found in the large clumps
of consumers referred to as the “unbanked”.

Unbanked consumers are those individuals who have little or no credit history, either by deliberately avoiding all forms of credit, or simply because they haven’t yet had the opportunity to establish credit for themselves. Either way, extending substantial amounts of credit to the unbanked has long been considered taboo by lending organizations, as the FICO Classic scoring model relied on so heavily in credit industries flagged such individuals as being unacceptable risks for investors. Now, however, companies such as Pay Rent, Build Credit, are bridging the gap between the unbanked and prime lending candidates.

For a long period of time, banks and other companies had little use for organizations such as PRBC. Now, however, in an eager, if not altogether desperate, search for qualified prospects, lenders are turning to information brokers such as LexisNexis, PRBC, and credit bureau TransUnion to dig up all the information they can find on an individual’s “unbanked” payment history, such as cell phone bills, rent deposits, tuition, magazine subscriptions, and so forth. Some agencies have gone ahead and begun to utilize this information in new credit scoring models, dubbed as “emerging credit scores”.

In all likelihood, it looks as if these new emerging credit scoring systems may become mainstream in a few years, which would have a dramatic impact on what credit card options are available to the average consumer as a result of creditors having a more complete picture of that person’s financial behavior. What does this mean for you and me? It simply means that more prudence needs to be exercised with traditionally unreported expenditures, particularly those expenditures which occur on a regular and continual basis, such as subscriptions or rent payments. As always, the new systems invariably favor those who are financially responsible and live well within their means.

Creative Commons License photo credit: SqueakyMarmot