Sometimes a new idea comes along that sounds helpful and is offered with the best intentions. Yet, on closer inspection, the idea fails to deliver what it promises and can end up doing more harm than good.
Such is the case with a legislative proposal circulating in Washington, D.C., that encourages rental-management firms, utilities and cable companies to report information about consumers’ bill-paying performance to credit agencies. The proposal’s intent is to help the “underbanked” or “credit-invisible” consumers who don’t consume credit regularly.
Unlike the majority of Americans who generate credit information by using credit cards or having student loans, mortgages, personal finance accounts, and car loans, the underbanked often lack a current mortgage, car loan or active credit card. By not consuming credit regularly, the underbanked fail to generate data.
When an underbanked consumer calls the cable company to sign up for service, an automated credit check normally comes up empty; the person lacks enough current credit data to generate a score. This unscored file may prompt the c able provider to conduct a further, usually manual, check of the person’s credit. This can lead to subjective underwriting while also delaying the start of service.
The legislative proposal seeks to expand scoring for the underbanked by adding data, including one’s record on paying rent, utilities and other bills. Currently, such nontrade information often is not part of a standard credit history.
For this legislative proposal to work, we must assume that the underbanked have a good record on paying utility, rent and cable bills. After examining credit data for a decade while working in cable, I submit this is not so. Our analysis of data from operators nationwide shows about 17% of consumers who request cable service are underbanked. Of this group, nearly 70% have a credit report containing adverse information. It is plausible this population may also struggle to pay rent and utility bills.
In fact, adding information to an underbanked person’s credit report could paint a worse picture should that individual have missed paying bills.
Highly reliable and federally compliant solutions have long been available to accurately segment the underbanked population. These permit MSOs to identify the small portion of the underbanked with an absence of adverse information in their file at the time of processing.
Should this proposal become law, however, companies could be faced with new costs associated with collecting the additional information. Customers with good credit today might find their score lowered because they missed paying a cable or utility bill promptly. And once consumers learn that a late payment on a cable bill has hurt their credit, it is reasonable to assume an increase in the volume of calls to cable call centers, resulting in yet more costs.
While I understand and sympathize with the intent of the proposal, there are better ways to help the unscored, such as educational programs to rebuild credit scores. It takes time and patience to rebuild a credit score, but it is doable. For the reasons above, we believe this is a better option.
David Howe is president of SubscriberWise, the largest U.S. consumer-reporting agency for the telco industry.