Answer (from CFPB and Consumerist): Credit reporting agencies (three of top four) and banks
The last few years have seen a number of start-ups lending money based on factors other than credit scores. Here are a few highlighted in a recent Economist article:
- Karrot: “Karrot worries less about borrowers’ credit history—the conventional approach—than about their cash flow. Customers must allow Karrot to monitor their current accounts and other financial data, such as credit-card bills. A big decline in income prompts an inquiry about an extended payment plan (to pre-empt a default); an increase prompts an offer of more credit. The initial evaluation takes only four minutes. Growth has been impressive: Karrot expects to lend $1 billion this year. Its default rate is 5%.”
- Upstart: “Upstart, based in Palo Alto, is another firm learning to look beyond the credit record, in this case to borrowers’ educational history—an indicator of future earnings and thus the capacity to repay debt.’
For the history lovers out there, a Time article provides an almost 200 year history of credit reporting. A few interesting morsels:
- Earliest credit reports were character based: “In 18th-century America, for instance, country storekeepers secured loans by asking well-regarded neighbors to vouch for their character to bankers and merchants. And urban creditors mined far-flung rural acquaintances for rumors and hearsay regarding applicants for credit.”
- Retailers saw benefits of selling on credit and therefore were early pioneers in developing credit histories on their customers: “Eager for these workers’ hard-earned dollars, many retailers—including America’s newfangled department stores and auto industry—extended generous credit lines.”
From Federal Reserve:
Answer: 13.5% in June 2015. Note that this rate will likely be much higher for millenials who may have lower credit scores due to their short credit histories. Interesting to note the sharp decline in rejection rate in the most recent reporting period as lenders seem to be loosening their standards.
Answer (from FTC report): About 1 in 4 (25%):
From American Banker:
A widely cited study by the Federal Trade Commission in 2012 found that one in four consumers have potential mistakes on their credit reports. Worse, one in 20 may have errors significant enough to negatively impact how much he or she pays for a loan, or whether credit is provided at all. Given that 220 million Americans are now on file with the bureaus, that’s 11 million consumers with possibly material errors on the reports they will use to buy a house, car or even secure a job.
So, the next time you ask your students to be sure to check their credit report, be sure to let them know the frequency of these errors!
Check out the NGPF lesson on Monitoring Your Credit.