Is the U.S. Facing a Credit Invisibility Crisis?

Over the past few decades, the shift of financial services to online platforms, the introduction of new payment methods and the digitization of various services have dramatically reshaped our financial lives. Despite these advancements, certain aspects have stayed the same. One of these constants is the ongoing significance of credit. Just as in the past, maintaining “good” credit continues to be essential for individuals looking to access a broad range of financial products.

In the United States alone, according to MoneyGeek, approximately 26 million people are classified as “credit invisible,” meaning they lack sufficient credit history to be scored by traditional credit reporting systems. Additionally, another 21 million have unscorable credit, either due to insufficient information or outdated credit activity. This growing problem is affecting U.S. citizens across numerous demographics and regions. If measures aren’t implemented to rectify the situation, then we risk individuals finding themselves “excluded” from the financial system. If this were to occur, more people would be unable to access essential services, hindering economic growth, deepening poverty and limiting full participation in the modern economy, ultimately leading to greater inequality.

The Misalignment Challenge

A closer examination of the United States’ credit invisibility crisis reveals several key factors driving this shift. The most important is the growing misalignment between the financial behaviors of U.S. citizens and the criteria upon which traditional credit assessment systems are based.

For context, despite the many changes we’ve witnessed, the criteria used by traditional credit assessment systems have remained largely unchanged since the 1970s. There is a rationale behind this; credit providers have a strong incentive to ensure they are lending capital only to those who can reliably and responsibly repay it. However, given the increasing numbers of credit-invisible individuals in the U.S., it’s clear that a more effective solution must be pursued for the benefit of everyone involved.

A Break From Tradition

Across the U.S., there has been a decline in activities that traditionally boost credit scores. This decline manifests in various ways, but one of the most significant is the reduction in successful mortgage repayments. Mortgage repayments have long been a crucial factor in traditional credit assessment systems, but their impact has diminished due to declining homeownership rates, particularly among young people. Without this benchmark, credit providers may find it more difficult to ascertain the creditworthiness of individuals and are therefore more unwilling to lend capital.

According to the American Bankruptcy Institute, the rate of homeownership in the U.S. is at its lowest level since 1965. Even more concerning, a survey conducted by the Harris Poll Thought Leadership and Future Practice found that 61% of private renters doubt they will ever own a home. This shift not only highlights the changing financial landscape but also underscores the growing disconnect between traditional credit assessment criteria and the realities faced by many Americans today.

Beyond mortgages, other traditional credit-building activities are also on the decline. Fewer American adults, particularly younger ones, are taking out auto loans or obtaining credit cards. This trend is influenced by economic constraints, a growing preference for renting rather than purchasing on credit, and the rise of new payment methods like Buy Now, Pay Later, which don’t contribute to credit building in the same way that credit cards do. This shift has exacerbated the catch-22 situation we face today, where the absence of a credit history leads to fewer opportunities to establish one, ultimately resulting in greater financial exclusion.

What’s the Alternative?

In addressing the issue of credit invisibility, alternative data sources present a promising way to more accurately evaluate creditworthiness. With the right strategy, non-traditional indicators like payment histories for mobile phone bills and adherence to long-term contracts can serve as effective measures of financial reliability, comparable to conventional factors. For those with limited or no credit history, these alternative data points help bridge the gap, enabling a broader range of individuals to prove their financial responsibility.

Moreover, these alternative data points better reflect the modern financial behaviors of individuals today. While homeownership and credit card usage have declined, the average person now maintains more monthly subscriptions than ever before. By analyzing the consistency of payments for these digital subscriptions, along with utility payments, lenders can make considerable strides in making credit systems more inclusive. This approach could open up new opportunities for previously credit-invisible individuals, allowing them greater participation in the financial system.

Putting Inclusion First

By leveraging the potential of alternative data points, credit lenders can uncover a wealth of underutilized information about applicants. Analyzing digital and social footprints offers an even more powerful tool, giving financial institutions deeper insights into consumers’ online activities. This method provides an unprecedented level of precision, flexibility and accuracy, all with minimal disruption to the user experience. By tapping into diverse data sources, the financial sector can expand its reach, enhance risk assessments, drive innovation and promote financial inclusion, all while adapting to the changing economic landscape.

Tamas Kadar is CEO and Co-founder of the Austin, Texas-based cybersecurity company SEON.