The Tale of Two Credit Scores: Why Thin Files Don't Tell the Whole Story

In the world of lending, numbers often tell the story. A credit score, just a three-digit number, can determine whether someone gets approved for a loan or is denied. But what happens when two applicants show up with the same thin-file credit score in the mid 600s? Without the full picture, a loan officer might struggle to decide who to approve, potentially missing out on a great borrower or taking a risk on a less reliable one.

Let’s explore the tale of two potential borrowers: Alex and Jamie. Both have credit scores in the mid-600s, both have thin files, and both are applying for a loan. On the surface, they look identical to the loan officer, but their financial habits tell two very different stories.

Meet Alex: The Financially Responsible Borrower

Alex’s credit score isn’t impressive at first glance. However, what the score doesn’t show is that for the past two years, Alex has been meticulously paying rent, utilities, subscriptions, and their phone bill on time every single month. Despite this, Alex’s score remains low because these payments aren't reported to the credit bureaus.

What the loan officer doesn’t see is that Alex is, in reality, a financially responsible individual. If this payment information were included in Alex’s credit history, their score would likely jump by over 40 points, potentially moving them from a "risky" borrower to someone worth approving.

Meet Jamie: The Risky Borrower

Then there’s Jamie. Jamie’s credit score is similar to Alex’s, sitting in the mid-600s. However, Jamie has struggled to keep up with bills. Rent payments are often late, utility bills sometimes go unpaid, and subscriptions are frequently canceled due to insufficient funds. Like Alex, these payment patterns aren't reflected in Jamie’s credit score, making it impossible for the loan officer to see the real risks.

If the loan officer could see Jamie’s full financial behavior, the story would be different. The late payments and missed bills would serve as red flags, suggesting that approving Jamie’s loan might be a risky move - maybe now is not a healthy time to extend credit to Jamie.

The Importance of Reporting Alternative Data

Today, less than 3% of on-time rent, utilities, telco, and other recurring payments are included in credit histories. This missing data can be the difference between approving a responsible borrower like Alex and denying a risky one like Jamie—or worse, making the wrong decision. When this information is reported to credit bureaus, it can be directly incorporated into FICO scores, offering a more accurate reflection of a borrower’s financial habits.

For borrowers like Alex, who have a solid track record with recurring payments, incorporating this data could lead to a significant boost in their credit score—sometimes by 40 points or more in just a few days. This shift doesn’t just benefit the borrower; it also helps lenders make more informed decisions, reducing the risk of loan defaults and fostering stronger, more trustworthy relationships with their clients.

The Future of Lending: Seeing the Whole Picture

As the lending industry evolves, it's crucial that we start looking beyond the traditional credit score. By embracing alternative data sources like rent and utility payments, we can paint a more accurate picture of each borrower’s financial responsibility. This not only opens the door for more individuals to access credit, but it also ensures that lenders like you are making decisions based on the full story—not just a thin file.

At float, we're committed to helping financial institutions harness the power of data to make smarter, more inclusive lending decisions. By including this often-overlooked information in the credit decision-making process, we can create a lending environment where everyone’s story is heard and valued.

So, the next time you're faced with two identical credit scores, remember: there's always more to the story. And with the right data, you can make sure that story has a happy ending—for both you and your borrowers.