The relatively unknown immigrant credit problem
There are 42.3 million immigrants in the U.S. — about 13% of the population. They are one of the largest demographic with considerable spending power. Most of them come from developing countries including Mexico, China, and India. They are concentrated in major states and cities with about 85% immigrants living in only 10 states.
These immigrants move to the U.S. to build a better life for themselves. One of the key things they need to start a new life is access to credit. Their need for funds also changes as their lives move forward. Initially, they need money for paying rental deposits, buying furniture, paying tuition expenses, buying a car, etc., and later, for a wedding, a house, or their spouse’s education, among other things. In the initial days, they often have to pay extra for a phone plan, put down deposits for utility services, and pay higher premiums for insurance because they don’t have a credit history. The U.S. credit system is not set up to help these people.
You need access to credit to build a credit history, and immigrants don’t have any history to get credit. They are stuck in a catch-22 (in some cases for many years).
It takes immigrants 6 years to build credit and develop something that is considered useful by banks and other lenders. Most banks won’t give them a loan because they are not U.S. citizens. Most commonly, banks worry that immigrants will run away with the loan. In their assessment, they are exposed to a huge flight risk when it comes to giving loans to immigrants.
These banks and lenders treat immigrants like second class citizens when it comes credit access. They are only viewed from the lens of a credit history, which they lack. Most developing countries don’t have comprehensive credit systems and it’s also not possible to use credit history from a home country as it is not accepted in the U.S. This leaves immigrants with few to zero options. All of them have to resort to painful, infeasible, or expensive options. They have to ask for help from family and friends, save for months to make a big purchase, or have their parents get them a collateralized loan back home.
Stilt is working on solving this pressing need for access to credit for immigrants. We believe they shouldn’t be treated like second class citizens just because of an archaic system set up in the 1950s.
Immigrants are actually lower risk than U.S. citizens in the comparable demographic. It is given that all legal immigrants are in the U.S. for work, education, or to be with their family.
All immigrants have to go through stringent checks including proving creditworthiness before securing a U.S. visa.
U.S. embassy doesn’t allow entry to deadbeats from other countries to their shores. This is one of the major reasons why all immigrants are a self-selected, motivated group of people who contribute 40% more than a comparable citizen in the country. They successfully face the many challenges of moving away from their family: learning a new language, adapting to a new culture, and fitting into a new society. In spite of all these disadvantages, 51% of the largest businesses in the U.S. were started by immigrants.
We have proved with lending to immigrants that they are the safest demographic in terms of credit risk.
It is not enough to try to fit them in a standard credit history report that they haven’t had the chance to build. Banks and lenders have made a mistake in combining them with U.S. citizens who have had their whole life here to build a credit history.
These immigrants need to be viewed from a new point of view; their credit risk should be calculated using a novel approach which appropriately evaluates their risk and gives them services that lead to a path of financial independence.
We will share this in our portfolio performance in the upcoming weeks and compare it to loans from other lenders who make decisions based on credit scores. Most of our borrowers were denied by these lenders. Now these immigrants are performing better than even the lowest credit risk categories of all other lenders.
