If you don't have a credit card or a mortgage payment, it's tough to get a bank's attention when you're asking for a loan. It's a Catch-22.
How do you get credit if you don't have credit? Now Congress is considering a bill, called the Credit Access and Inclusion Act, that would make it easier for nontraditional borrowers to show they're worthy of the risk.
The idea is pretty simple. Not everyone owns a credit card or a house, so to help calculate a credit score why not use cell phone and utility payments? While you're at it, throw rent payments into the mix. "Not doing this is a real harm," says Michael Turner, who heads the Policy Economic Research Council.
PERC studies non-traditional methods of building credit and is a big supporter of the bill. Turner says it would give millions of minorities, college-aged kids and other low-income groups access to cheaper loans. "If you don't have a credit report or enough information in your credit report to generate a score, the default assumption is you're too high a risk and you're automatically rejected," he says.
PERC research shows that adding a utility would help 74 percent of "credit invisibles" get a credit score. Right now, Turner adds, many of these invisibles turn to high-cost payday loans to survive, or put off their dreams altogether.
Marco Meraz is the owner of Republica Empanada, a new restaurant in downtown Mesa, Ariz., and knows what it's like to be ignored by a bank. "This is our first venture into the restaurant industry so we're novice entrepreneurs," Meraz says.
On a recent Friday night, his staff was busy getting the getting the kitchen prepped for the dinner rush. "It definitely requires a lot of patience."
Meraz has long had dreams of opening this Latin restaurant, but with only a single credit card to his name and no experience running a business, the bank wouldn't give him a loan. "We had to find alternative means to finance this project," he says.
The alternative was a $20,000 line of credit obtained through a local neighborhood economic development group called NEDCO. Meraz finally started slinging empanadas this summer. But what if his credit report had included years of on-time cellphone and utility payments? Meraz says, "It would have allowed us to open our business a year-and-a-half sooner. That's a big difference."
Not everyone is sold on the promise of extending credit this way. Mike Sullivan, a credit expert at Take Charge America, says it will only complicate an already too complex system. "I think there's a lot of pitfalls along the way here," he says.
First of all, Sullivan says it's hard to predict if a customer will pay a credit card bill just because he pays his rent and water bill on time. Plus, Sullivan says credit reports are already full of mistakes, and disputing an inaccurate score is bureaucratic a nightmare. "So making it more complex isn't going to help that situation. It's going to probably hurt a few additional consumers because their credit isn't correct," he says.
Reporting rent and utility payments would still be voluntary under this bill, and credit agencies already do this on a limited basis. A spokesperson for Equifax, for instance, says the company already manages a database of 70 telecom, cable TV and utility companies.
"I don't necessarily believe it needs to be legislated," says Rene Castillo, who works at Salt River Project, a utility company that serves nearly a million people in the Metro Phoenix area. Castillo says her company reports severely delinquent accounts to collection agencies, but SRP won't punish customers every time a monthly payment is missed. "Power is something people need," she says. "There are things that happen in people's lives and we have programs and services that help them become current on their bill and not to have a problem."
And this is a point that opponents of the bill will make. In hard times, a few missed utility payments could bring down a credit score a lot faster than years of paying on time.