Lenders use credit reports to see how well you borrow money and pay off debts. The information in these reports can help determine whether you qualify for a mortgage, a car loan or a rewards credit card offering an enticing sign-up bonus.
Yet, if lenders use your credit report alone, they are doing so without having comprehensive information about your money situation. While credit reports include the status of accounts from certain lenders as well as delinquency information and credit inquiries, they are missing details about assets, cash flow and even some debts.
“Less isn’t more in these circumstances,” says Leslie Tayne, a debt attorney, author and founder of Tayne Law Group, P.C. in New York. Without having the full picture of a person’s finances, lenders may make decisions that could unfairly limit access to credit or saddle borrowers with debt they can’t afford to repay.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
Below are four missing pieces of information from your credit report that could paint a clearer picture of your overall financial situation, according to experts.
1. Your assets. A credit report includes information dating back no more than 10 years and only lists accounts from businesses that are registered to report to credit bureaus. These include both open and closed accounts as well as bankruptcies and delinquency information. However, bank accounts, retirement funds and other assets are not included.
There were 45 million people in the U.S. who had little-to-no credit history in 2015, according to the Consumer Financial Protection Bureau. Some of these people are credit invisible, meaning they have no credit history. Others have thin files, which means there isn’t enough recent information in their report to provide a credit score. However, including information about consumers’ assets could provide lenders with an understanding of how these people manage money as well as what resources they have available to repay a debt. Knowing a person has a sizable balance in their savings account could make financial institutions feel more confident in extending credit to those with thin credit files or no credit files.
2. Your seller-financed real estate payments. If you successfully paid off a mortgage, the closed account can remain on your credit report for a decade, positively impacting your credit score. However, those who finance a home through the seller, rather than with a traditional lender, won’t receive that benefit.
“A lot of times, a land contract or offer to buy won’t show up on a credit report,” says Dawn-Marie Joseph, a financial planner and president of Estate Planning & Preservation in Williamston, Michigan. Many people purchased homes this way after mortgage lending regulations tightened in the wake of the last recession, Joseph says. However, timely payments on these homes don’t get reported and can’t help build good credit.
The same can be said for other payment plans, such as automobile purchases and personal loans made between individuals that circumvent a traditional lending agency.
3. Your cash flow. Those with a limited credit history could also benefit from a credit report including cash flow details. This information would allow lenders to see how money flows in and out of a person’s bank account as well as the balance typically maintained.
[Read: 10 Simple Ways to Raise Your Credit Score.]
“If you look at someone’s cash flow, you can see if they can afford this $500 payment,” says Nick Thomas, president and co-founder of financial solutions provider Finicity. “It’s the ultimate indicator of [the] ability to pay,” he adds.
Finicity already works with mortgage lenders to provide digital access to cash flow data if authorized by the consumer. However, cash flow information has not yet been incorporated into credit reports for use in other lending scenarios. “There are lots of discussions in the industry right now about adding cash flow to the decision-making [process],” Thomas says, but there isn’t a standard way to do so at this time.
4. Your complete debt record. In addition to omitting items purchased through seller financing, credit reports don’t include other forms of debt, such as medical bills that are delayed by less than 180 days and 401(k) loans. Tayne thinks those pieces of information should be included, even if they result in restricted access to credit for some consumers.
Without having that information, a lender may extend credit beyond what could be reasonably repaid. “That doesn’t necessarily benefit the consumer,” Tayne says. Though being denied credit could cause short-term financial pain, it may ultimately help people strengthen their money situation in the long run.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
Adding these four categories to credit reports wouldn’t make everyone happy. “People don’t want [creditors] too much into their business,” Tayne says. However, including information about assets, cash flow and all forms of debt will give lenders a more complete view of someone’s financial situation. Then, families can have access to an appropriate amount of credit and avoid situations in which they are set up for failure by taking on excessive debt.
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4 Things That Aren’t in Your Credit Score But Should Be originally appeared on usnews.com
