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'Credit invisibles' gain hope through new reporting plans

They are known as "credit invisibles." Perhaps they have gone through a recent bankruptcy and decided to lower their debt load. Some of them have recently gone through divorce or other life-changing events. Whatever the scenario, these people have sub-prime credit scores because they have sought debt relief, which makes them unable to secure loans despite their newfound financial responsibility.

These victims of the system may have a blemished, incomplete or non-existent credit report. About 64 million Americans fall into this category because they have declared bankruptcy or simply do not have an adequate credit history to calculate a credit score.

People who may fall into this category should be hopeful, though, as lending companies develop new scoring systems for loan candidates. Some previously bankrupt borrowers are good credit risks, even though the traditional credit score may not reflect their financial savvy. These efforts could provide a financial haven for borrowers who have been effectively shut out of the lending system for years at a time.

The new scoring system relies on different measures than a traditional credit score. Lenders consider payments toward rent, phone bills, electric bills and gas payments, along with employment and relocation history, to create a more comprehensive picture for the borrower. Credit card companies are also including information about users of pre-paid card programs in a pilot effort to examine spending habits.

Even though some credit bureaus have been collecting information about utility and rent payments for decades, that information has not become widely available until recent years. The down economy has necessitated creative lending practices that cast a wider net for borrowers.

Lenders are not required to use the new information, however, so it is unclear exactly how the payment statistics will be used. Pending legislation aims to improve credit scoring by requiring the inclusion of rental and utility payments, but tracking that information remains challenging.

Still, those with tarnished credit scores should be optimistic about their borrowing future. An initially positive reception has shown lenders' willingness to consider alternative scores, which could be a boon for those who have previously declared bankruptcy.

Source: The Wall Street Journal, "For 'credit invisibles,' a market takes shape," Suzanne Kapner, Nov. 19, 2012

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