March 8, 2021

Bucks: Considering Money Transfers in Calculating Credit Scores

Can data about electronic money transfers be used to help create credit scores for people who rely on them?

That’s the subject of a study to be undertaken by the new Consumer Financial Protection Bureau. The agency, which officially opened for business on July 21, was directed to look into the matter by the Dodd-Frank financial reform law. The new agency is also reviewing ways to provide clearer disclosure of the exchange rates and fees charged for the transfers, which can be substantial — up to 13 percent of amounts up to $200, according to a preliminary report from the agency.

The question is whether money transfers, known as remittances, are in any way predictive of a consumer’s ability to repay loans. Remittance users typically rely on the transfers instead of using banks or credit cards. Right now, credit histories generally don’t contain remittance data. So people who rely on money transfers often have trouble getting credit scores, which limits their access to loans and even housing.

Many remittance users were born outside the United States and use the transfers to send money to family members and friends in their native countries. About six million households make personal transfers, mostly to Latin America and Asia, with amounts averaging $200 to $400. The overall volume totals billions annually. The funds are generally sent on a cash basis — the sender submits cash at a money-transfer location like Western Union and the recipient picks up cash in the foreign country, sometimes within minutes.

Remittance payments are usually voluntary transfers, made without any sort of contract. But it’s possible that payment patterns indicate a user’s ability to meet payment obligations. To study whether this may be the case, the bureau is assembling a database of information from a large remittance provider, as well as credit score information from a credit bureau (the report doesn’t identity them, but says they won’t provide any personally identifiable information to the federal government).

“A finding that consumers who send remittance transfers are more likely to repay their debts than other consumers with similar credit histories could suggest that adding remittance data to credit scores would tend to raise credit scores relating to remittance senders,” the report says.

Assuming that there is some connection between regular remittance use and credit behavior, there would still be hurdles to incorporating the data into the credit reporting process. Some users of money transfers prefer to remain anonymous (transmitting companies are required to obtain identifying information only when the customer sends amounts of $3,000 or more), and probably wouldn’t be interested in having their transactions recorded to help establish a credit file.

One way to address this, the consumer bureau noted, would be to give senders the option of reporting their remittance history to a credit reporting agency to “build credit.” “This opt-in approach to reporting,” the report said, “might enable the company to build loyalty among certain remittance senders without alienating other senders who wished to retain their anonymity.”

Do you think it makes sense to consider money transfers in the credit reporting process?

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