Will JPMorgan’s New Initiative Help Americans With “Invisible Credit” Get Their First Credit Card?

Thursday, The Wall Street Journal reported as JPMorgan Chase

, Bank of America

, and several other major banks had launched an initiative to offer credit cards to people who “don’t have a credit rating but are financially responsible.” Although roughly 45 million Americans do not have a credit score, most adults do have some experience in paying rent or other bills. Examining their checking account balance over time can show whether the consumer is making reliable bill payments or if they are struggling to make ends meet. A history of regular monthly utility payments or rent may show, for example, that a consumer could likely repay a loan, while late charges or frequent overdrafts in a checking account history of a consumer may indicate financial hardship. The consortium of participating banks agreed to share some of this checking account data with each other, so that, for example, Bank of America might consider your Wells Fargo

verify account details if you are applying for a Bank of America credit card. A pilot project is expected to be launched later this year, with an initial focus on credit cards.

Will this new initiative help Americans get their first credit card and start building their credit history? Here are some reasons to be skeptical.

Credit cards are already widely available for people with no credit history: When it comes to credit history, everyone has to start somewhere. According to a 2017 report from the Consumer Financial Protection Bureau, 80% of Americans establish their credit history before the age of 25. The report found that a minority of Americans – about one in four – establish their credit history with the help of a friend or family member, who either adds their loved one as an authorized user. on a credit card or co-sign a new loan for them. But about three-quarters of Americans build a credit history without relying directly on someone else’s credit rating: while you probably won’t get a $ 300,000 small business loan from a company. large bank with no credit history, banks are more willing to try their luck with someone. with a completely empty credit report when it comes to low-end credit cards. Student loans and retail loans are popular choices for building credit histories, but credit cards establish the credit histories of more than 3 in 10 Americans, more than any other type of financial product.

Some consumers are advised to deposit a security deposit to get their first credit card, but the CFPB report found that 97.5% of adults who first establish a credit history with a credit card before age 25-year-olds get an unsecured credit card, rather than a secured credit card.

The point is that at the high rates charged by some credit card companies, the vast majority of consumers have attractive lending prospects: even consumers with a 1 in 2 probability of default.

Many people who don’t have a credit score have had credit problems in the past: A common misconception about credit scores like FICO is that anyone who has used a credit card, student loan, car loan, or other loan product will have a credit score, as long as their lender has reported information. at the credit bureau. But to have a FICO credit score, you must have recent credit history: a loan that has been opened and has reported new information at some point in the past six months. When a consumer declares bankruptcy or defaults on all of their loans without declaring bankruptcy, you can expect them to have a very low credit score, like 400 or 500. But if the experience leaves them with no credit account. open credit, after six months there you will have a “zero” or “missing” credit rating. However, negative information, like missed payments, will still show up on their credit history for several years: therefore, when a bank or lender pulls out that consumer’s credit history and finds missed payments or recent bankruptcy, they may be too scared to lend, even with that additional driver checking account data.

According to a Quantilytic from December 2017 report34% of all Americans without a credit score have negative information on their credit report, for example, accounts in collection or old credit accounts that have been “billed” or in default. According to the report, 13% of additional consumers have actually “taken out” credit: their credit rating has become obsolete because they have closed all of their credit accounts. The average age of those who “withdrew” from credit is 71 years old. Another 47% percent have no credit check on their credit report, meaning they haven’t applied for credit from a major U.S. bank in the past two years, asking the question of find out if these consumers really want credit (not everyone). Although this still leaves a portion of consumers without credit who are new to credit and may be looking for an entry point, the remaining group are relatively young – their average age is 24 – and typically the type of consumer able to find loans under the system existing.

Consumers of ‘invisible credit’ are more likely to be unbanked: Many younger Americans who don’t have a credit score simply haven’t been successful in building a credit history, but for older Americans it’s a different story. Seniors who have not used credit have often had bad experiences with banks or face significant obstacles in maintaining a bank account. Wealthy Americans might think that having a checking account is ‘no-brainer’, but for low-wage workers, it’s another story: as Lisa Servon, professor of urban and regional planning at the University, explains. from Pennsylvania in his book America’s Unbanking: How the New Middle Class Survives, Low-income adults often face overdraft fees or cannot maintain the high minimum balances needed to avoid monthly fees, forcing them to choose check tellers or other alternatives over a banking relationship. traditional. According to data from the Federal Reserve’s 2018 Survey of Household Economics and Decision-Making, 72% of American adults without a credit card have a checking or savings account, but that rate drops to just 65% of American adults without a credit card who are between 25 and 55 years old. In other words, the new initiative has nothing to offer 35% of middle-aged adults without a credit card, since they won’t have any checking account data for banks to look at.

Americans in marginalized communities don’t just seek affordable credit – they also seek positive banking relationships and often see a lack of options. S&P Global 2019 report found JPMorgan Chase disproportionately shut down bank branches in predominantly black communities, an effect the authors found could not be explained by income alone.

So who is most likely to benefit from the data sharing initiative? Young, high-income professionals and recent immigrants with healthy checking account balances will be the biggest winners: Instead of being offered a credit limit of $ 500 or $ 1,000 to start with, credit card issuers could offer them the same high credit limits, up to $ 5,000 now. offered to Americans with a long credit history and a high credit rating.

The JPMorgan initiative was reportedly launched with encouragement from federal regulators: in the aftermath of the police shooting against George Floyd, the Office of the Comptroller of the Currency summoned banks and nonprofits to identify how to “increase the ‘access to credit for historically disadvantaged communities. ”, Resulted in the agreement to share bank account data for the subscription of credit cards. But if banks and regulators are to make a difference in disadvantaged communities, they may need to dig deeper and make bigger changes to their business practices. Credit card companies charge black borrowers an average interest rate of 17.7%, or nearly two percentage points more than the interest rate that these companies charge white borrowers.

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