A LendUp data scientist spoke on a conference panel a few months ago and was approached afterward by a woman in the audience. She’s a PhD in vision science working at one of the country’s top universities. A protracted court case over one of her patents turned her finances upside down and walloped her credit score. She said she wanted to thank LendUp because we helped her get back on a path to better financial health.
She’s far from alone, and word’s getting out. Recently, the Wall Street Journal published an article about how companies like LendUp are expanding access to credit. The story explained that modern technology can go far beyond traditional FICO and Vantage scores to identify creditworthy customers who have subprime credit scores -- typically defined as below 680. As a result, people previously shut out of mainstream credit products now have access to quality credit cards with reasonable rates and fees, plus a great mobile-first experience. Costly, fine-print-heavy “fee harvester” credit cards are now not the only choice for consumers with subprime scores.
Naysayers quickly emerged. Scanning the article’s comments section reminded me of Jimmy Kimmel’s Mean Tweets videos. Here are a few:
“There is something about newfangled stuff that makes people believe it can solve every unsolvable problem of the past. Reality check...sub-prime really means sub-prime.”
“We used to call them "LOAN SHARKS", what idiots decided to let this practice re-emerge? It is evil, and harms many; it IS Anti American!”
“Credit like this simply makes the poor poorer. There is no economic or societal good happening here.”
More than half of the US has a credit score below 680. According to the Department of Labor, 78 million working adults -- more than half of the US workforce -- are hourly workers, and many have some post-secondary education. Alissa Quart, in her 2018 book Squeezed: Why Our Families Can't Afford America, calls this new middle class the “Middle Precariat.” As the New York Times described it: “Much that middle-class professionals took for granted in previous generations, including homeownership, decent health care, a comfortable retirement, is now out of reach.”
Thinking about the WSJ article comments, I’d argue that shutting out the majority of the US from quality credit is what’s truly anti-American. And the fact is, “newfangled” technology is what helped us build a business model that wins when customers win -- and, as a result, create massive and sustainable economic and societal good.
According to Credit.com, a person with a subprime credit score will pay $250,000 over the course of their lifetime in added fees and interest. That means they still have access to credit -- it’s just really expensive credit, with exorbitant fees and rates.
That’s where technology comes in. Technology enables a company like ours to go deeper into, and beyond, credit scores in our underwriting. We evaluate a person’s financial picture more holistically, including:
- Ability: What’s the person’s income? Unlike salaried employees, hourly and gig economy workers have income volatility, so the question is, do they have a consistent inflow of funds?
- Stability: Do they have a job? Several jobs? What’s their tenure?
- Willingness: Have they shown a track record of payments?
As illustrated by the chart below, the story behind a score varies wildly. You can see how additional data beyond a credit score can power more predictive credit policies and risk models, which in turn lead to better decisions.
Lending money is easy. Getting it back is the hard part. We saw that prior to 2008, when mortgages were handed out like Oprah handed out cars. We also saw it in 2008 and after, when many consumers defaulted on their loans because they couldn’t pay their debts.
Ten years on, thanks to technology, we can make more informed credit decisions, expand access to quality credit, and broaden financial inclusion. There’s no longer any excuse for financial services companies to shut out more than half of the country from mainstream credit products.
Debra Jack is VP of Communications at LendUp