Articles by Canadian Lenders Association

How to Think About Credit Invisibility

Authored by:
Lily Cook, Researcher at Canadian Lenders Association
Tal Schwartz, Senior Advisor at Canadian Lenders Association

Recent research by PERC has highlighted the issue of credit invisibility in Canada, defined as “persons with either no account payment history in their credit report (referred to as “no files”) or fewer than three accounts in their credit report (referred to as “thin files);”

In Canada, credit scores are calculated using payment history, outstanding debt, credit account history, recent inquiries and types of credit. However, according to research from Cornerstone Advisors, the ‘on-ramps’ to being credit visible are limited and come with challenges. The most common paths are:

• Credit cards:

In general, Canadians under 25 tend to use credit cards at far lower rates. Those in that age group who do have a credit history have the highest percentage of credit scores below 520, according to Equifax Canada.

• Collections: Collections as a point of entry into a credit system immediately sets the consumer at a disadvantage, since the first thing to identify them is a negative characteristic.

The rate and impact of credit invisibility in Canada is significant:

• 35.3% of Canadians are credit invisible vs. 19.3% in the US.
• the issue disproportionately affects immigrants, minority communities or younger individuals.

How are fintechs addressing this?

1. Access to alternative data

Canadian data aggregators provide lenders with access to non-traditional credit information that advanced firms can apply ML to in order to better adjudicate credit.

• Open banking data providers like Flinks and Inverite provide consumer transaction history information that allows fintech lenders to underwrite credit invisibles based on their cash flow instead of their credit score.
• Commercial data providers like Forward AI, Boss and Railz pull financial data from accounting systems, payroll, and point of sale terminals in order to give lenders a more fulsome picture of a businesses health.

2. Make alternative data mainstream

PERC Canada recommended that the CFPB explicitly include non-financial institutions in their definition of a ‘creditor’ in order to report positive payment data to credit bureaus. Credit reports that could ‘reward’ customers for paying telecommunications bills on time, for example, could make the credit system more forgiving in the future.

• Billi, for example, a Canadian fintech allows users to integrate on-time payments for their Amazon Prime and Netflix accounts into their credit reports in order to improve them.

Canadian credit bureaus have also taken active steps to being more inclusive of alternative data. A prime (no pun intended) example is Landlord Credit Bureau’s (LCB) and Equifax’s partnership to allow rent payments to count towards credit scores.

• Both as a way to reduce risk for landlords and give tenants a leg up in the market, this shared use of alternative data is “ninety-plus per cent….positive in nature, so overwhelmingly landlords use this to reward tenants,” LCB’s CEO, Zachary Killam said.

3. Create a better on ramp to credit building

Credit building loans can unlock credit for those with minimal histories or challenging track records. These are installment loans that only pay out once the customer has paid them off, and are offered by fintechs like as Spring, Marble and Refresh.

Essentially reverse loans, the reverse structure protects the lender, in the event that the customer doesn’t make all their payments. Over the course of the loan term, the customer’s payments are reported to the credit bureaus. Borrowell, which recently acquired Refresh’s credit building loan portfolio, is now one of the largest providers of this service in Canada.

So what’s the solution?

In order to drive meaningful change on the issue of credit invisibility, fintechs must continue to enable lenders to challenge the limitations of the credit system – by improving access to alternative data, normalizing its use and building better on-ramps to the credit system than collections and credit cards.

Credit invisibility is caused largely by structural issues within Canada’s data markets, but fintechs are starting to fill these gaps.