A (personal) case for cross-border credit sharing and alternative data

Using cross-border credit and alternative data should be more normalized to give the immigrant population in the United States access to the financial services they need.

It is presently 2023 and the norm is still to use credit scores, whose evaluation methods really haven’t changed since their invention in 1989, to evaluate consumers for mortgages, rentals, credit card approvals, and more.

My experience with the broken system

When I graduated in 2020, it was the peak of the pandemic. Thankfully, I had family friends in the Bay Area who opened their homes to me. I was working for a startup at that time and during a conversation with an older uncle, an immigrant from India, he advised me to get a secure credit card. Confused, I asked him why, and he said that I needed a good credit score.

While I didn’t understand at the time, the thought of a credit card that I could offload my purchases onto (who let me graduate from Berkeley without a financial literacy course?!) felt like a relief. To my dismay, I only qualified for a $500 credit line, but I used it to pay my monthly Netflix and Spotify subscription fees.

Life led me to move back to my home country, Malaysia, for the next 7 months, but somehow in that time, since I was consistently using less than 30 percent of my credit, I came back to the U.S. in July of 2021 with a credit score of 650 or so.

My lack of credit history would come back to haunt me when I needed to rent my first apartment. I would either have to put down a large deposit, far more than I could afford, or look for a co-signer. I successfully found a co-signer in my roommates' parents whom I had known during college but I was definitely an outlier.

After my first painful encounter with the credit system, I sought to learn more about it. It was then that I read Ramit Sethi’s 'I Will Teach You To Be Rich' which has changed my life. With a consistent cash flow from a new job, I opened two new credit cards and was really proud of myself when I crossed the 700 score threshold in April 2022. While the two credit cards I qualified for came with sky-high APR’s (24 percent), it was a risk I was willing to take because I felt like I had learned the credit game.

The issue at large

My experience, while it may be similar to that of people that come here for undergraduate or graduate degree programs, is not the case for the majority immigrant population in the United States. Most immigrants come here and almost instantly need access to a car to get to work and to rent an apartment to live in.

The Census Bureau’s monthly Current Population Survey (CPS) shows the total foreign-born or immigrant population (legal and illegal) in the U.S. hit 47.9 million in September 2022. That’s approximately 14 percent of the total U.S. population.

Based on the Bureau of Labor Statistics the number of foreign-born workers employed in the United States in 2021 was approximately 26 million. That’s 26 million people that need access to phone plans, credit cards, auto loans, mortgages, and more.

The not-so simple solution

In the lending industry, the greater the volume of data lenders can get their hands on, the better the underwriting decisions they can make. Consumer-permissioned data, defined as transactional and account-level data that a consumer permits lenders to view and use in credit decisioning, has become increasingly popular.

Lenders are more inclined to consider this type of alternative data now more than ever because of the realizations that traditional credit and credit scores do not paint a complete picture of a consumer.

Out of the 26 million foreign-born workers I mentioned before, the Bureau of Labor Statistics counts 24 million of them as being 25 years and over. Chances are, wherever they were from, they held jobs, had credit cards, and maybe even owned a home, which makes them perfect candidates for decisioning via alternative data.

So really, why isn’t alternative data or cross-border credit data used to make underwriting decisions? With cross-border credit, there are two main problems. Firstly, different credit bureaus store vastly different data on consumers. From an engineering perspective, trying to map credit data from Brazil, will reveal that there is some information a U.S. lender might want that the data doesn’t provide.

Truly, standardization of the data is tricky. Additionally, national credit bureaus may be sensitive to releasing information to foreign companies because there isn’t a cross-border regulatory body that oversees or makes rules about this type of data sharing. With alternative data, I believe the lack of adoption here lies heavily in a lack of research. In a report released by the United States Government Accountability Office in November 2021, the percentage of loans without borrower credit scores purchased by government-sponsored enterprises like Fannie Mae and Freddie Mac were a meager 0.09 percent and 0.05 percent.

There seems to be uncertainty around if alternative data has the predictive power that traditional credit data has and concerns around if alternative data may present variables that are closely related to factors like race, ethnicity, and gender, which if used to make underwriting decisions, is illegal.

My proposition

Given the challenges that exist, I believe that there are two main things we can do to move the needle on the usage of cross-border credit and alternative data for scoring. Firstly, more research on how to use alternative data by the institutions that have the most to gain by being able to provide financial services to a greater number of people.

Immigrants and people that fall through the cracks of the traditional credit system are a large, untapped market, and the first to provide access to financial services to them will have a lot to gain. Secondly, regulation around data privacy, specifically from foreign credit bureaus. While governmental shifts are always hard to push for, a proactive definition of what you can and can’t do with foreign credit data will give foreign credit bureaus more confidence to share data.

While the current credit scoring system and underwriting methods are comfortable to lenders, the industry as a whole could use a nudge in a more inclusive direction. To reiterate, the problems facing immigrants who want to access financial services are also the same problems a large number of Americans face.

I anticipate a day when I’ll be able to rent an apartment and get a mortgage with a reasonable interest on the basis of my credit history in Malaysia and bank transaction data, not based on the fact that I don’t have at least 7 years of credit history and ten tradelines when I’ve only been in the U.S. for a few years and only got an actual paying job two years ago.

We can do better.

Image credit: Olleg / Shutterstock

Dhivyaa Mailvaganam is a Software Engineer at Nova Credit based in San Francisco, CA.