Skip Navigation

6 Advantages of Alternative Credit Scores and Data

6 Advantages of Alternative Credit Scores and Data

There are many ways to determine someone's creditworthiness. Unfortunately, the same traditional methods are often used, excluding large groups of potentially reliable borrowers; that's where alternative credit scores can help. This contemporary scoring method gives lenders a modern way of measuring a consumer's creditworthiness using factors not traditionally considered. 

What is an alternative credit score? In a nutshell, a person's creditworthiness is determined by looking beyond traditional credit reports and questions. The resulting data is then compiled and generated into a score that considers previously ignored factors. 

While this may seem like an additional step, it's important to consider that 45 million Americans are credit invisible - meaning they don't have a credit score- according to the CFPB. But with the help of alternative credit scoring tools, this market can be breached, and business can grow.

Keep reading and better understand the benefits of alternative data and the useful tools we at MicroBilt have developed to help lenders gain the most insight from this data.

Make the Invisible Visible Using New Alternative Data

As previously mentioned, "credit invisible" consumers are missed solely due to a lack of data. Although this shortage of data stems from several reasons, according to the CFPB's most recent report, nearly one in ten adults fall into this category due to being too young, new to the country, or simply lacking a history of using credit. These reasons shouldn't play a primary role in denying a customer a loan.

Peer-to-Peer Lending Can Assist Businesses with No Credit History

Peer-to-peer lending options continue to grow in popularity. A 2023 report valued the market at $82,300 million in 2021 and expects it to touch $804,200 million by 2030. This growth is largely driven by the number of startups and small businesses looking to bypass traditional loans due to having little to no credit history. With the help of alternative credit, approving a company for a loan doesn't have to be a blind decision.

Alternative Data Drives Financial Inclusion

Financial inclusion is nothing new, but now businesses are placing it at the top of their agenda. A 2022 LexisNexis report found that more financial institutions prioritize financial transparency and inclusion but face challenges in getting there. Alternative data can help a company leverage new data to reach a much wider range of demographics by ignoring biases and creating opportunities for customers who want to avoid entering the formal financial system. 

Alternative Credit Sheds Light on "High-Risk" Customers

Using alternative data, lenders can make a better, more informed decision on a customer who might otherwise be ignored due to traditional credit scoring platforms. More information can be useful in helping lenders determine extenuating circumstances and provide a "bigger picture" idea of a person's actual credit situation. Alternative credit data can also deliver more information to ease the credit decisioning process for lenders.

Don't let Competitors Pull Ahead

More and more businesses are using alternative data in their day-to-day operations and are benefiting from it. A 2023 LexisNexis survey interviewed senior decision-makers for marketing and lending in the financial services industry to see how many actively use alternative data during the credit decisioning process. Results showed that 65 percent of respondents used it for 50 to 100 percent of new applicants. This is the start of an increasing trend for institutions across the industry.

Automation Requires Alternative Data

Automation is at the forefront of today's business world. With AI and other new technologies being introduced into the workplace, it's forcing companies to consider new ways to streamline their loan decisioning process. But with the inclusion of AI also comes a requirement to have much more data on hand. Alternative data is essential for the automation process to work correctly without taking on more credit risk.

How can we help?

Getting started with alternative data can be challenging, with so many new data points to consider and new customers to assess. Let MicroBilt help you. Our iPredict Advantage 3.0 product helps any business hit the ground running by enabling them to quickly evaluate the risk level of a potential loan applicant leading to reduced defaults, better margins, and more efficient business processes.