Borrowers with less-established credit may be more likely to repay

U.S. consumers who had a single tradeline and then added a new one within the next two years had far lower delinquency rates than their peers with more established track records, TransUnion found in a new study.

These consumers, who most typically obtained credit for non-mortgage products like auto loans or cards, had a 5% delinquency rate over a six-month period compared to a 7% for experienced borrowers.

While relatively few thin-file consumers in the U.S. apply for mortgages in the two years after establishing their first tradeline, the findings point to an untapped market of underserved borrowers that lenders might be able to do more to reach out to as refinancing dries up.

“In the U.S. specifically we saw them performing a lot better, which I think is definitely a very positive sign and potentially leads to less reluctance to extend credit to them,” said Nidhi Verma, vice president of international research at TransUnion, in an interview.

Mortgage originators in particular want an established track record from borrowers before lending them money for a home. That’s in part due to the fact that key government-related agencies in the mortgage market use older underwriting methods, although they are working on updating these.

Fannie Mae — a large government-linked mortgage agency — has begun examining rent payments in underwriting to help bolster the histories of potential homebuyers with thin-credit files. Also its competitor, Freddie Mac, has partnered with a vendor in an effort aimed at facilitating the reporting of rent payments from tenants living in multifamily units it helps finance. Rental payment information may improve credit model predictability by 10% or more, according to a previous TransUnion study.

Improved predictability could play a key role in convincing lenders to grant consumers additional credit at lower rates that might be more compelling to borrowers.

Those lacking a credit history or having a thin file commonly cited reluctance to take on more debt and the cost associated with it as reasons they don’t, Verma said. If lenders become more comfortable with the predictability of alternative data like rent payments and lower the cost of lending in response they might be able to convert more customers, she added.

“Generally speaking the underwriting cutoff from a score perspective, as well as the credit history needed, is much more stringent to get a mortgage underwritten and approved as a consumer. So that certainly plays a huge role in why incorporating alternative data assets, such as rental payments, can empower credit inclusion for those who are unserved or underserved,” said Verma.

In the U.S., more than 45 million people fall into these categories, according to TransUnion.

During a two-year period prior to the pandemic, 24% of them became credit active. Between June 2020 and 2021, that percentage was slightly lower at 22%, TransUnion found.

The percentage of people in the United States that are considered underserved when it comes to credit is 37 million or 14% of the adult population, In comparison, 3% of the adult population or 8.1 million are unserved.