The Change That Could Give Millions of Americans a Better Credit Score

Millions of consumers could be lifted out of subprime status and get better loan terms if credit reports and scores were broadened to consider on-time utility and rent payments, according to a study released Wednesday by Experian.

Experian is advocating for inclusion of non-traditional entries onto consumer credit reports, expanding them beyond loans, credit cards and mortgages. Doing so would allow consumers with “thin” files — those with very few traditional credit accounts — to more easily obtain loans and credit cards.

“By adding on-time alternative payment data to credit report files, millions of consumers could gain access to basic financial services such as loans and credit cards,” Experian said in a statement.

The Experian study suggests it could also give a second chance to consumers who have been flagged as a poor risk by the credit industry.

Experian’s study found that by including on-time utility payments in credit reports, there was nearly a 50% drop in subprime consumers with credit scores, and a corresponding 54% increase in consumers rated “non-prime,” which puts them only one level below prime.

“Since gas and electric services are used by just about every household in the country, including these positive payments in their credit files provides millions of Americans with a way to build their credit history,” said Genevieve Juillard, president of Experian’s Consumer Information Services.

Experian’s study also examined the impact of adding rent payment history to credit files, and found it lifted 20% of consumers out of the subprime category.

Last year, credit reporting agency TransUnion conducted a similar study that offered similar results. It found that 8 in 10 subprime consumers experienced an increase in their credit score after just one month of hypothetical inclusion of rental payments into their credit histories.

“We believe reporting rental payment performance is simply the right thing to do for apartment residents and the apartment rental industry,” said Tim Martin, executive vice president at TransUnion, at the time. “Renters will be able to build positive credit history, gain access to more financial products, and most importantly, help them recover from the housing market crash.

For its study, Experian created a hypothetical, adding 25 months of positive payment history to consumer credit files culled from its database.

It’s unclear what percentage of subprime or nonprime consumers would have such a clean utility or rent payment history — Experian doesn’t have full access to that information — so the real-world impact of adding alternative payment histories might be less that this study suggests. Still, it’s clear that consumers with only a small credit profile, or with a damaged profile, would see improved credit opportunities if they paid their other bills on time and got credit for doing so.

“While an individual’s credit score is important, the thickness of a credit file is also a critical factor in a lender’s decision,” said Chris Magnotti, strategic analytic consultant for Experian. “An increase in the credit file thickness alone, even with the risk segment remaining the same, can yield benefits such as lower credit card interest rates.”

Consumers who want to know more about their credit standing should check their credit regularly – they can get a free annual credit report from each of the three major credit reporting agencies. They can also access two of their credit scores for free every month on Credit.com.