Big banks roll out credit cards for customers with no credit score
There are millions of adults in the United States who don’t have a credit score, but that doesn’t mean they don’t deserve to have access to the money to borrow. And several large banks, including JPMorgan Chase (NYSE: JPM), plan to do something about it. In this fool live Video clip, recorded on May 17, Fool.com contributor Matt Frankel, CFP, and Focus on industry Host Jason Moser explains how and why the big banks are offering credit cards to consumers who traditionally may not be eligible for them.
Jason Moser: Well, speaking of overhauling the credit industry, there is another interesting title that came out here recently. Some of the biggest banks, JPMorgan Chase, Wells fargo (NYSE: WFC), US Bancorp (NYSE: USB), and others are looking for new ways to get consumer credit, even though those consumers don’t necessarily have a credit score to help guide that decision and steer limits and rates. These banks are considering using other financial data to do this. Now, I think that’s something we talked about on the show several months ago when we saw that FICA was going to revamp the way they calculate their scores. We are looking at new ways to provide credit. But it really does seem like these banks are very interested in leveraging a lot of the data they already have so that they can make informed decisions. Honestly, to me, I mean, that makes a lot of sense. I mean, if you go on data that you already have, if you go on history, in theory these banks should have a lot of relevant data that should help them make informed decisions. I mean, I don’t know. I think that’s at least one more way to help people get started that weren’t there before. I remember a while ago when I was working in the bank I remember people coming in and the only way for them to have a chance to establish a credit score, even remotely, was to get something like a secured credit card. Like if you had to deposit $ 250 or $ 500 to get your loan secured basically by credit card. People like that, I mean, you didn’t have $ 250 or $ 500 just to drop on a whim. I do not know. To me, it looks to be very promising if executed.
Matt Frankel: For sure. The one you are referring to is called the UltraFICO score.
Frankel: To be honest, it was a flop. We learned that not only have very few lenders accepted this, but no bank has adopted the UltraFICO model. It didn’t quite work out the way the people at FICO had expected. That said, many Americans believe that every adult in the United States has a credit score. I mean, I think I was thinking that until I became a financial planner. To get a credit score, you must have at least one reporting account from the past six months on your credit report.
Frankel: Do you know how many people don’t have this?
Moser: I mean, I don’t know the number but I would dare say it’s probably a good half of the population.
Frankel: Fifty-three million adults.
Moser: Well, it’s not far.
Frankel: It’s a lot.
Frankel: These 53 million disproportionately include minorities. That’s a big part of why the government is really supporting this plan to try to level the playing field a little bit. As you mentioned, a bunch of banks have signed on to this plan, JPMorgan, Wells Fargo, and so on. You want to reach consumers who don’t have traditional credit scoring-based borrowing opportunities because if you don’t have a credit history a lot of lenders unfortunately won’t talk to you. Right now, he considers things like consumer savings accounts and history of balances and overdrafts a record of responsible behavior. This could possibly include things like rent payments, utilities. They’re trying to partner with a lot of different sources to come up with an alternative lending model, kind of what FICO was trying to do a few years ago, but was really unsuccessful. If they could do it, I mean you have to cross a thin line between what really becomes a credit score and excluding people.
Frankel: Because in most cases, you need credit to get an apartment to have a rental history, for example. I mean, I needed to have my credit when we set up electrical service here. I’m sure you will too.
Frankel: You want to be able to get as much data to really give an accurate picture as possible without the unintended consequence of excluding even more people because they don’t have these things. But no, that’s obviously a good thing. Democratizing the financial system is what we’ve been talking about with all of these fintech disruptors here. You want to introduce inclusiveness into the financial system. Anything that does that, I’m all for it.
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