Credit scores play a significant role in determining an individual’s ability to succeed in the financial landscape of the United States. Without a good score, they will struggle to obtain housing or any type of loan, as they are not able to prove their trustworthiness. Credit scores are a direct reflection of someone’s borrowing history, meaning companies will only be willing to lend out money to someone if their score reflects a high likelihood that they will get it back.
Unfortunately, almost a third of adult Aemrcians have limited credit history, so it is difficult for companies to determine their reliability. There are 61 million people with thin credit files, meaning they have less than 4 credit accounts in their history. 16 million people have no credit history at all. Young people, immigrants, widows and divorcees, and heavy cash and debit users are usually most at risk for having low amounts of credit history.
Subprime credit scores have a significant influence on a person’s future, due to higher interest rates on loans. In extreme cases, such as mortgages, a homeowner can end up spending an extra $30k over a 30-year loan. In an effort to reduce these inequalities, some companies are using alternative data, which uses information outside of traditional credit reporting to determine if someone has shown the ability to pay bills on time.
