In the current economic climate, it is understandable if lenders are a bit wary of doling out loans to subprime consumers. It is the subprime market, after all, that has led to much of the current economic problems. This doesn’t mean, however, that it is impossible for subprime borrowers to get a loan – either a credit card or other type of larger loan.
A new wave in lending shows that underbanked consumers are getting a second look by lenders. What’s an underbanked consumer? It’s a person with a limited credit history. They don’t have a lot of loans to their name so they’ve never really had the chance to prove if they are a responsible borrower or not. Subprime borrowers very often are in the category of people who have continually defaulted on past loans. It’s a much different circumstance.
The Importance of Credit HistoryWhat this suggests is that lenders are looking well beyond what is implied by a credit rating. Just looking at a number – say 650 – does not entirely inform a lender about what type of borrower you may be. Make no mistake, a credit rating is determined by longevity, not just responsibility. If you have a limited history paying off loans, this will be reflected in a low credit rating. This does not necessarily imply, however, that you will be irresponsible. For example, if you have a decent income but a limited credit history, lenders may just be willing to take a chance on you.
True subprime borrowers are those borrowers who have defaulted regularly, thereby proving that they will be more likely to default in the future. Lenders are more willing now to take a chance on those underbanked consumers who have not had a chance to prove their credit worthiness. It is estimated that there are 40 million people who qualify as underbanked consumers, so ignoring this huge customer base would be a mistake for the lending industry.
New Credit Rating ModelsThe major credit bureaus of Experian, TransUnion, and Equifax are set to revise how credit ratings are calculated, which will in part help lenders gauge the risk of underbanked borrowers. There are also separate risk-assessment firms, such as LexisNexis, which attempts to evaluate these types of consumers. In nontraditional credit scoring, a consumer is gauged for more than responsibility with payments. For example, if a consumer has stayed in one location for an extended period, this demonstrates lower risk than a person who has moved around continuously. All in all, this is good news for consumers who are worried about having a limited credit history. While it’s still necessary to try and elevate by paying off a loan, such as a credit card, new credit scoring models will help more borrowers secure loans.
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