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Can Lenders Benefit from Analyzing Alternative Credit Data?

Boaz Gam

Boaz Gam


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Article content
  1. Traditional Vs. Alternative Credit Data - Key Distinctions
  2. The Importance of Alternative Credit Data
  3. Alternative Credit Data Use Benefits for FIs
  4. What Is the Future of Credit Scoring?

Alternative Credit Data: The Future of Loan Decision-Making

Until just a few years ago, lenders would only take “traditional” credit data into account when assessing people’s solvency and making loan decisions. However, this approach is far from perfect, as it doesn’t take a large share of the population into account. As a result, millions of individuals overlooked by the old scoring system remain virtually invisible to finance companies.

In addition, with such major events as the COVID-19 pandemic causing financial disbalance across social groups, credit scores are failing to grasp the bigger picture, and, hence, are becoming less reliable. Fortunately, there’s a modern way of addressing these concerns by using alternative credit data. Keep reading to find out what it is and how it can be used to better assess potential borrowers!

Traditional Vs. Alternative Credit Data - Key Distinctions

Alternative Credit Data: The Future of Loan Decision-Making

Traditional credit data is collected by credit bureaus that create reports about individuals and businesses. Then, lending institutions review these reports to get an idea of the consumers’ ability to pay back loans. Such data typically includes the following details:

  • Credit card history
  • Loan repayment history
  • Mortgage history
  • Credit inquiries
  • Bankruptcy files

Alternative credit data, on the other hand, cannot be found in the databases of the national credit reporting agencies (NCRAs) yet has the capability to enhance consumer lending decisions. Some examples of such information are:

  • Rent and utility payments
  • Money management markers - how long a person's bank account has been active, the frequency of deposits and withdrawals, the amount of savings, etc.
  • Property and asset records
  • Reports on alternative lending payments (payday loans, installment loans, auto title loans, and so on)
  • Demand deposit account (DDA) information, such as recurring payroll payments and average balance

Such insights enable private persons to stand a chance when applying for credit and to break out of the vicious cycle when they can’t get loans because of a lack of credit history, and vice versa. But how sharp is the need for alternative credit data use in the finance sector?

The Importance of Alternative Credit Data

Alternative Credit Data: The Future of Loan Decision-Making

In the US, 24% of adults are underbanked and 10% are completely unbanked, which sums up to roughly one-third of the country’s citizens finding themselves cut off from traditional banks and loan companies. In developing countries, these figures tend to be even more alarming.

The concept of alternative credit data plays into promoting financial inclusion by humanizing potential borrowers. This means that the use of the insights it provides enables lenders to see loan applicants as people in their real-life context rather than as mere numbers reflecting credit scores.

This is extremely important in modern circumstances, as the world is experiencing a series of major events that often result in unexpected situations. For instance, an individual could earn a poor credit score due to a medical emergency or another type of one-time debt. In the long run, such a flaw in the credit history may not reflect the person’s true risk for the lender.

Thus, while the implementation of alternative credit data in the assessment of people’s creditworthiness doesn’t require a lot of resources from the lenders’ side, it has the power to create a significant impact on a global scale. What’s more, this initiative offers advantages not only for consumers but also for financial institutions - find out more about it below.

Alternative Credit Data Use Benefits for FIs

Alternative Credit Data: The Future of Loan Decision-Making

Lenders can implement alternative credit data across the loan lifecycle. Here are a few examples demonstrating how an FI’s strategy can benefit from additional financial insights:

  • Improved marketing. Analyzing additional applicant data enables FIs to better understand and segment their audiences and deliver more targeted content along the consumer journey.
  • More informed decision-making. More data means a better understanding of overall credit risk and enhanced loss forecasting for FIs.
  • Lower chances of fraud. When requesting alternative credit data, FIs get an excellent opportunity to identify potential red flags in applicants.
  • Better customer experiences. Additional financial details enable lenders to provide service to their clients in a more personalized way.
  • Higher revenues. Alternative credit data enables lenders to widen the pool of potential clients and increase the number of profitable loans in their portfolios.

As you can see, there is plenty of potential that alternative credit data offers not only to consumers but also to lenders, which makes the interest in it grow more and more.

What Is the Future of Credit Scoring?

Alternative Credit Data: The Future of Loan Decision-Making

The use of additional financial insights in solvency assessment is transforming the concept of the credit score as we know it today. While alternative credit data is not widely adopted just yet, newly emerging scoring models tend to factor it in. For instance, FICO® '08 takes utilities and telecom bill payments into account, while FICO® '09 also pays attention to rental tradelines.

These baby steps help to set up a strong foundation for a future with inclusive, fair, and accessible money lending services, financial inclusion, and sustainable economic growth.

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