A Tale of Two Families

John and Jane Smith are in their late 20s, have two children and purchased a home just over a year ago. For the last several years, they tried on their own to save money for a downpayment and closing costs, but other expenses and obligations made this a challenge. To help, Jane’s parents agreed to pay for most of the downpayment. Since becoming homeowners, John and Jane have paid off their monthly mortgage payments in full.

Michael and Mary Johnson have the same income as the Smiths, and have two children as well. They want to become homeowners, but are also finding it difficult to save for pre-purchase costs. Unlike the Smiths, they do not have family members to help them with these expenses, so they are renting. Their monthly rent is the same amount as the Smith’s monthly mortgage payments.

As each month passes and another mortgage payment is made, the Smiths have watched their credit score climb steadily up. Over the same period of time, the Johnsons have seen only modest changes to their credit score.

What Separates These Families?

The difference between the Smiths and the Johnsons is their homeownership status. The Smiths’ mortgage payments are automatically reported to the credit bureaus and are used to calculate credit scores. On the other hand, the Johnsons’ rents are not automatically reported. While it is possible to include rent payments in credit scores, they often don’t factor in. Renters and landlords are either unaware they can be included, or landlords don’t want to go through the certification process required to report rent payments from tenants.

What results is diverging access to affordable credit between the two families. Even though both families make the same income and are dutifully paying the same housing costs each month, only the family with the mortgage gets the benefit of credit. This example highlights the inequity of such a system. The Smiths could own a home because they inherited money from family, while the Johnsons didn’t have that help. Black and Latino households are particularly disadvantaged under a system like this, where they are without large family supports more often than White families.   

The Power of Alternative Data

As we have pointed out before, a person’s credit report and score significantly affects their financial health, and can impact the life choices they make. Having a subprime score or no score at all puts affordable credit out of reach and reduces financial security. Scores are also used by employers and landlords for hiring and rental decisions, and are becoming increasingly important in our data-driven society.

Along with rent, many other expenses are not routinely reported to the credit bureaus. These are also called alternative data, and include utility and phone payments. Yet much like rent, excluding these payments is fundamentally unequal. Expenses that are regularly reported—like mortgages and credit cards—are the type of debt that tend to be held by wealthier families, whereas pretty much every household has a phone payment of some kind.

At the same time—as we highlight in our policy brief—there is evidence that including rent, utilities and phone payments in credit reports benefit households considerably more than harming them, all without compromising the predictive power of the score. Including these types of payments could reduce structural inequality and bring many households into the credit mainstream.   

The Credit Access and Inclusion Act

In recognition of alternative data’s potential to create a more inclusive and equitable credit market, Representative Keith Ellison (D-MN-5) reintroduced the Credit Access and Inclusion Act (H.R. 435) early last year and gained more than 30 co-sponsors. The bill encourages the increased reporting of alternative payments to the credit bureaus. It also removes some operational burdens that make it less likely for tenants assisted by the Department of Housing and Urban Development (HUD) to have their rent reported by their housing providers.

Opponents argue that reporting utility or telecom payments should be considered a violation of privacy, and worry that families could be harmed if they fail to make timely payments. It is unclear how reporting utilities is more an invasion of privacy than reporting mortgages or credit card payments, which are systematically reported without permission from a borrower first.

In terms of the potential to harm, as mentioned above, much evidence exists to suggest significantly more people would benefit than would experience a dip in their score. Moreover, when a utilities bill is turned over to collections for failure to pay, this is reported to the Bureaus, which already lowers scores. It does not seem fair to punish someone for missing a payment while not rewarding them for repayment.

With the support of advocates, the bill passed the House unanimously in February. Now we need your help to move the bill forward in the Senate. Please look out for additional alerts and information about this important legislation in the weeks to come!

Other Efforts

In addition to this Act, we have sent a comment letter to the Consumer Financial Protection Bureau (CFPB) highlighting the value of this data, as well as one to the Federal Housing Finance Agency (FHFA) recommending the use of more progressive scoring models by Fannie Mae and Freddie Mac.

We are committed to promoting the use of more inclusive scoring models through the increased reporting of safe, vetted alternative data like rents, utilities and phone payments, both now and going forward. Through these common-sense changes, we can help more families reach their financial and personal goals, and take a small but meaningful step toward closing the racial wealth divide.