JPMorgan Chase, Wells Fargo and US Bancorp are among the major US banks working on a government initiative to get credit into the hands of people without or with a low credit rating, The Wall Street Journal reported Thursday (May 13), citing sources.
In order to get a clearer idea of people’s financial responsibility, banks have indicated that they will exchange customer deposit data from current and savings accounts and grant loans to people responsible for their money but whose the credit rating is low or zero.
There are about 53 million adults in the country who don’t have regular credit scores, according to Fair Isaac Corp., the company behind the FICO credit scores, according to the Journal. A report from the Consumer Financial Protection Bureau indicated that black and Hispanic adults are more likely than other groups to not have a credit score.
The plan is to launch a pilot program before the end of the year. Banks will determine creditworthiness based on people’s account balances and overdraft history, the sources told the WSJ.
If the pilot program works, the banking subscription will be revised. Currently, underwriting is based on credit scores, credit reports, and payment history. People who pay for goods and services with a debit card or with cash do not have a credit report.
A new credit scoring system has been developed by FICO which now takes into account how people manage their money as a whole. No financial institution accepted the idea and few lenders signed up, the sources told the WSJ.
Banks and credit card companies are currently dealing with a large number of customers who paid off balances during the pandemic. Many have also fully paid off their credit card balances. The Federal Reserve Bank of New York called the drop in credit card debt “confusing” as people also shop and plan trips.
Some credit bureaus have started to take into account rent payment history as a way to build a consumer’s financial history to achieve a different score than what lenders typically rely on.
Credit ratings are now at an all time high despite the global pandemic and historically high unemployment. The average FICO score increased by 7 points in 2020 to a record high of 710.