Banks plan to offer credit cards with no credit rating
Chase, US Bank, Wells Fargo and other major credit card issuers have announced a new pilot program to make credit card approval easier for consumers without a credit score. According to a Wall Street Journal report, banks plan to share information about checking and savings accounts to develop another way to assess applicants’ creditworthiness.
- Without a credit score, it is virtually impossible to get a credit card from a major issuer.
- Several large banks are now considering bank account activity as another way to assess a candidate’s creditworthiness.
- The program could provide significant opportunities for historically disadvantaged communities to obtain credit at a reasonable price.
Banks help make credit cards more accessible
Historically, it was extremely difficult to get approved for a credit card, even a secured credit card, without a credit score. While some credit card companies allow co-signers, many large issuers do not.
Today, however, some of the largest banks in the United States are working to get regulators to think about ways to assess financial responsibility outside of the credit system. Instead of focusing on past transactions with creditors, card issuers would look to an applicant’s bank accounts to assess their financial responsibility.
If an applicant does not have a credit score, for example, but has no overdrafts or returned checks on their checking account, it could improve their chances of being approved for a credit card.
It is not an entirely new concept. Petal caused a stir in the credit card industry in 2018 by launching a new credit card that did not require a credit score to be approved. Instead, the fintech company asked applicants to connect their financial accounts, and the company would develop a cash flow score based on how they handled their money.
That same year, FICO announced a new credit scoring system that includes how consumers manage their bank accounts. So far, no bank has used it.
However, some large banks have started small-scale initiatives with this concept. Chase, Bank of America, and others have tweaked their risk models for existing customers with little or no credit history to include bank account activity with the same bank.
The new pilot program, which should start later this year, goes further, with around ten banks agreeing to exchange data. Applicants are not required to have a bank account with the credit card issuer they are applying to.
The banks are also discussing potential partnerships with financial data aggregators like Plaid and Finicity to factor a candidate’s rental and utility payment history into credit applications.
Why access to credit is important
When it comes to consumer debt, credit card debt is less than ideal. But according to FICO, more than 50 million adults in the United States do not have a traditional credit score. So when they need credit, they are forced to resort to much more expensive and sometimes predatory options, including payday loans.
The Consumer Financial Protection Bureau highlighted the problem in a 2015 report, showing that black and Latino adults were more likely to have no credit rating than white and Asian adults.
Without a credit rating, it is virtually impossible to access other forms of credit, such as auto loans, mortgages, and even private student loans, especially at reasonable rates.
The upcoming pilot program has its origins in the REACh project, short for Roundtable for Economic Access and Change. The effort was started by the Office of the Comptroller of the Currency and challenged bankers, fintech executives, and leaders of nonprofits to develop ideas on how to improve access. credit for disadvantaged communities.
An underwriting system that takes into account alternative credit data can make it easier for people in these communities to qualify for a credit card. And if they use the card to demonstrate good credit habits, it can help them build a credit history, opening up more opportunities for car loans, mortgages and more at reasonable prices.