Columbia International Affairs Online
CIAO DATE: 8/5/2007
Utility Payments as Alternative Credit Data: A Reality Check
2007 March
Abstract
Access to credit is one of the cornerstones of wealth-building in the United States. Yet, between 35 million and 54 million persons are not participating in the credit market. Many individuals outside the credit mainstream are unable to access credit, or credit at competitive rates, because of the lack of traditional information, such as mortgage and credit card payments, available on their credit files. However, there is evidence that the inclusion of alternative data on credit-like payments, such as utility payments, in credit reporting can help bridge this information gap.1 The first step toward filling this gap requires utility companies to systematically report these data to the major credit bureaus.
This report offers some initial insights into the possibility, experience, and hurdles of data reporting for utility companies. The authors surveyed 64 members of the Edison Electric Institute members and drew from roundtable discussions on alternative data held at the Brookings Institution in 2005. This report articulates several preliminary findings that warrant further investigation. These findings include:
- There are currently few regulatory restrictions against full file reporting; however, the lack of clear guidance on full file reporting by state regulatory commissions creates a disincentive for utility companies to report.
- Of the electric companies surveyed that are currently reporting data to credit bureaus, half are full file reporting (i.e. reporting both timely and delinquent payment records versus only reporting delinquent payment records).
- Full file reporting is used by some companies as a management strategy for reducing late payments (arrearages).
- The costs of data reporting are minimal once an automated data reporting system is put in place; yet, dedicating the necessary information technology resources to establish an automated system is a challenge.
- A perception of utility companies not reporting is a marked rise in customer service calls regarding credit report inquiries, resulting in an increase in customer service time.
- Increased consumer education on managing the credit consequences of utility payment practices could help address some of the concerns reported by the utility companies.
Further research needs to be undertaken to investigate incentives and disincentives to full file data reporting and identify paths to overcome these barriers. The inclusion of alternative data in credit risk modeling has the potential to create a more fair and accurate system for assessing individuals’ creditworthiness in the U.S.
