Where You Went to College Could Determine Credit Approval
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Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York, where you went to college and whether you graduated could play a big role in whether you're approved for credit. And many people aren't happy about that. We'll check in with a Journal Economics reporter in a moment for some details. First, some money and market news you should know. Over the past week, the nervous stock market has pushed bond prices higher, and that has pushed bond yields lower.
How is alternative data being introduced to evaluate creditworthiness?
And those lower yields have pulled down mortgage rates. Lending companies are being flooded with calls from borrowers looking to save hundreds of dollars a month. by refinancing their mortgages or use lower-rate loans to buy more expensive homes. The average rate on the standard 30-year mortgage is down to 3.6%. That's the lowest level in almost three years. Think about it this way. Late last year, mortgage rates were near 5%. A 5% rate on a $500,000 30-year loan translates into a monthly payment of $2,684. At 4%, the monthly payment, excluding taxes and insurance, would fall to $2,387.
We've told you about efforts underway to improve the credit scoring system and ultimately give more people access to credit. But introducing some new sets of data to calculate a credit score is rubbing some people the wrong way. And Wall Street Journal reporter Yuka Hayashi is on the line with us with some details. So, Yuka, the idea here is to help lenders reach people who do not have access to credit in the U.S., and that is around 45 million people.
Yes, that accounts for about one in five people in this country and policymakers for a long time have thought about ways to get at least some of these people the access to credit. Now, a lot of people are paying attention to the use of computer driven models and alternative data as a way to help some of these folks.
Can you give me an idea of some of the new kinds of data that would be used to calculate credit scores?
There is a range of data that could be used. Some of the less controversial data include things like your rent payment, utility payment, cell phone payments, or looking at your bank statements to see what comes in and what goes out. These types of data are fairly widely used already and seen as less controversial.
But there's also more controversial data such as where somebody went to college and if they actually graduated.
On the other end of the spectrum from less controversial things like utility payments or the use of social media data, you know, cases where lenders look at your Facebook feed, look at your photos, who you're friends with, determine whether you are worthy for credit. This type of data is still seen as very risky by lenders. So as long as I know, lenders stay away from this type of data, but in the middle are information like people's education background, occupational history. These types of data are used by some lenders, but they are controversial.
And opponents of the use of this alternate data, or at least people who have concerns, they say that this could hurt efforts by lower income or minority borrowers to get access to credit.
So some lenders, some particularly student loan lenders, only lend to people with college diplomas, people who have actually finished college. But if you look at census data, the percentage of people who have a bachelor's degree is so much higher among whites and Asians, much lower among African-Americans and Hispanics. So consumer advocates say that, you know, if you use this type of data, you would only exacerbate the inequality in access to credit, not make it better.
And we're not just talking about achieving fairness with minorities. Young people with little or no credit history, they're often left out of the credit equation as well.
Yes, that's right. So the focus on alternative data is in part coming as a response to the criticism of the current credit reporting system. the information provided by companies like Equifax and Experian. And in their methodology, the primary source of data is people's past history of loan payment.
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