Big banks could issue credit cards to adults without credit scores through government-backed program

A government-backed pilot has some big U.S. banks signed up to use alternative data to let folks have access to credit that have traditionally been underserved and unable to borrow, the Wall Street Journal reported.

Around 10 banks have signed up for the program that’s expected to start up this year, and those banks include JPMorgan Chase, Wells Fargo and US Bancorp, the WSJ reported citing anonymous sources. The banks are also in talks about whether to work with data aggregators like Plaid and Finicity, the sources said, to see an applicant’s history with paying rent and utility bills.

The program is aimed at those who don’t have credit scores and the banks would look at individuals overdraft histories and account balances. The program would be a notable change in how banks underwrite, since historically banks have looked at credit scores and credit reports to determine loan-worthiness.

The news organization reported that about 53 million U.S. adults don’t have credit scores, according to Fair Isaac Corp. These underserved adults usually have to turn to expensive payday loans or other alternative measures.

The CFPB said in a 2015 report that Black and Hispanic adults are more likely to not have credit scores than white or Asian adults.

The Wall Street Journal noted that banks could decide to leave the program and this could also present risk for loan losses if this method doesn’t work out. Other concerns include data privacy and transparency.

In other recent news, FinLedger recently spoke to OppFi (formerly OppLoans), a Chicago-based loan servicer that partners with banks to offer small-dollar loans to credit-challenged customers, about how its at the center of a debate around how best to reach customers with low credit scores.

OppFi seeks to bring low-credit-score customers into the financial system. Their products, however, aren’t cheap. Loans typically range between $500 and $4,000, and some of them carry APRs that go into triple-digit percentages.

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