October 6, 2017  |  Insights

We Deserve a Credit System Built on Trust

Authored by: David Henderson, Chief Data Officer

In early September, Equifax lost the country’s trust when its servers were breached, exposing as many as 143 million consumers’ credit histories and personal identifying information to hackers. Last week, the Equifax CEO lost his job. While this incident has jeopardized almost half the country, the credit scoring system has been failing the 40 million people living in poverty for decades.

The consequences of a bad credit score, or no credit history at all, are well documented. Credit reports are used for more than opening credit cards, they are used by employers in hiring decisions and by landlords when selecting tenants. The 26 million people who are credit invisible find ways to succeed despite the application of credit scores in various aspects of life. Families with low credit scores can find themselves in a trap — where credit reports limit employment opportunities as interest payments pile up. And just as people of color are more likely to be poor, so too are poor people more likely to have low credit scores, in effect making credit scores a proxy for race, perpetuating racial inequality.

It’s tempting to think low credit scores are the result of poor financial behaviors, but evidence suggests low-income households are active savers and the majority of those living in poverty work. The problem is not that low-income families are not creditworthy, but rather that our credit scoring system ignores the signs that demonstrate their investability.

At the Family Independence Initiative (FII), where I serve as Chief Data Officer, we are partnering with thousands of low-income households across the country to create an alternative approach to resourcing communities built on mutual trust and respect. We call our approach the Initiative Score, but it might be easier to think about it as a “hustle score.”

We collect a wide range of indicators from families we partner with, over 400 data points and counting. Families regularly submit data through UpTogether, our online platform, providing common financial indicators like income and assets, but also telling us how their kids are doing in school, how they are supporting each other, what goals they are setting, etc. Through our data platform we have seen families engage in social capital exchanges valued at over $3 million dollars, creating tangible value in their communities. These are data points traditional credit scoring system do not have access to, which is why they so underserve low-income markets. We’re focused on more than just what makes people poor, but what makes people people.

By treating families as partners, FII earns trust, and with that trust we can more accurately assess all the initiatives families take, beyond demonstrating creditworthiness. As we learn about the initiatives families take, we make financial investments back in these households, modeling the way credit decisions should work for everyone.

The Equifax breach is about more than hackers exploiting a security vulnerability, it is about the way we trust and invest in each other as a country. We all deserve a more secure, fairer credit scoring system built on trust that sees us as people worthy of investment rather than profits to be maximized or costs to be minimized. The Initiative Score is not just a new way of demonstrating the creditworthiness of low-income families, it is a new approach to informing the deployment of credit. The old way of doing business hasn’t worked for the poor for decades, and now it has failed 143 million of us. Let’s try something better.

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