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News

Without Traditional Financial Profiles, Gen Z Finds It Hard to Build Their Credit History

By:
Karen Sibayan
Published Date:
Nov 15, 2024

GettyImages-615726996 Meeting Woman Business Banker

Ryan Brinkhurst, founder and CEO of Beautifi, talks about the experience of buying a new house. He said that "despite having the economic means and having spent four months of stressful negotiations with the bank, I wasn’t able to lock down my mortgage until two days before closing." He is a comparatively young entrepreneur and his income stream does not comply with the model built in the 20th century so the bank needed a lot of convincing, he explained

Like him, Gen Z is experiencing the same hardship, and it can be more difficult for young earners like Gen Zers to prove their qualification for a mortgage or line of credit. Banks might say no to them just because their financial footprint is not like those borrowers in the 1900s, Brinkhurst wrote for Forbes.

In the past 20 years, he said that the way people live and earn has quickly changed as employment has become precarious. He also characterized earning a living as remote and constantly evolving.  Those with multiple jobs are usually paid in various formats instead of a simple W2 form.

Brinkhurst noted that this "disenfranchisement" is not good news, as without access to credit, the next generation will continue to grapple with investing and building equity. At the same time, it can be very hard for young workers to accomplish their long-term goals. The answer, Brinkhurst believes, is to radically update the manner in which lenders assess them.

He called the three-digit credit score system "a relic" that has been around in some form for centuries. When lenders utilize that score to make decisions as to whether to make loans—and on what terms these loans would be issued—they depend on the basic inputs that bureaus utilize such a bill-paying track record, and credit card status, among other measures. Lenders then examine the borrower’s taxable income. However, the analysis often stops there.

These mini snapshots provide a limited view of the borrower’s financial profile. Although these constraints make the credit scoring system unfairly biased, many institutions believe it cannot be improved. Brinkhurst disagrees with this premise.

He said that behind every borrower is a complicated and dynamic story. This can be doubly true for young borrowers whose financial lives do not follow the standard. Many young earners have not had the opportunity to build the traditional credit record that Baby Boomers have, and their work lives cannot be accurately assessed through pre-internet models, Brinkhurst wrote.

"Real change is needed, and the tools to devise a better—and more equitable—system already exist. Here are two major shifts that can help make borrowing more accessible for the next generation," Brinkhurst noted.

New machine-learning tools allow cash flow underwriting, which is a more dynamic way to get to know a borrower’s banking history. Lenders can get a 365-day view with meaningful trend analysis. This does away with the mere snapshot that traditional credit scores deliver. Cash flow underwriting can pick up on features like a borrower’s minimum balance on a monthly basis if they have gone through a job loss in the last 90 days, if they are receiving regular e-transfers, among other borrower activities.

Even their social media postings can be utilized to help form a picture of their finances. Brinkhurst said building this more holistic understanding" of each borrower enables lenders to be more thoughtful and humane. For instance, should a major health crisis or medical debt destroy an otherwise flawless credit history? Considerations like this only become possible, though, when lenders have the willingness to reimagine the stories they look for. 

Although fintech can open doors for young borrowers, Brinkhurst said that a sticking point is that new and alternative lenders do not always report to national credit bureaus. If agencies like Equifax do not log that activity, borrowers do not earn important credit score bumps for paying off their loans which can leave them back at square one when they ask traditional banks for mortgages.

Whether it’s a buy-now-pay-later loan for a flight ticket or a pair of sneakers, microlenders need to capture and report that payment history so credit depth can be built and future lending decisions are fully informed. If traditional lenders and credit agencies want the most accurate possible picture of a borrower’s finances, Brinkhurst recommended working with fintech startups to gather data points from all possible sources.

Brinkhurst says that everyone stands to benefit: Each time the underwriting process is fine-tuned, operational costs and increased efficiency lower. At the fintech company Brinkhurst founded, for instance, they report data back to credit agencies to give their users a way to improve their long-term credit scores.

He said that borrowers shouldn't be punished merely because their jobs and income streams appear different. With a little creativity, we can build a future where alternative financial lives do not stop borrowers from funding their dreams.

He knows from first-hand experience that candidates who were previously dismissed by lenders usually look very different when their larger stories are told. In the end, lenders can find new customers, and borrowers can access loans at the rates they truly deserve. Brinkhurst said that this means more individuals—and younger people—have a real chance to take their next leap forward.