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3 reasons why you shouldn't rely on traditional credit data alone

Jan 13, 2017 Walt Wojciechowski

Loan officers require comprehensive financial information when assessing consumers' ability to pay back loans. However, they rarely collect all the data necessary to build a solid understanding of whether a person is creditworthy.

Traditional credit reports can only tell lenders so much about a person's overall financial situation. An Equifax report may show a customer was late on a few credit card payments, but it doesn't detail extenuating circumstances that may have affected the individual's ability to pay balances on time. Here are three reasons why lenders shouldn't rely on traditional credit data alone to make credit decisions.

"The Mississippi AG found the big three credit bureaus used incorrect data to develop reports."

1. Traditional credit reports aren't always accurate
Relying heavily on traditional credit scores can put lenders at a huge risk, especially regarding Equifax, TransUnion and Experian's history of producing inaccurate reports. In fact, Mississippi Attorney General Jim Hood recently announced that the three big credit bureaus would pay the state $7.17 million to settle their failure to properly verify debts within their reports. Hood maintained the credit bureaus used incorrect information to develop reports.

If Equifax, TransUnion and Experian consistently fail to identify accurate data when creating consumer credit reports, how can lenders make wise decisions when engaging customers? Suppose a loan officer uses a TransUnion report to assess a person's ability to repay a car loan. In this instance, the bureau forgot to include a second credit card the customer has in his name. Although the customer has failed to make payments on time and in full each month on that card, the loan officer has no idea that's the case, and chooses to extend credit based on positive information within the report. This is an example of how a traditional report can lead to a risky loan.

2. Lending to millennials is difficult
Millennials recently over took baby boomers as America's largest generation, accounting for 75 million individuals in 2015, according to Pew Research. That means lenders are going to have to find a way to engage Generation Yers if they hope to survive in the near future.

"Even accurate credit reports don't deliver a complete financial profiles."

Loan officers hoping to extend lines of credit to millennials will find traditional credit reports leave them very little to work with. The Consumer Financial Protection Bureau noted more than one third of individuals between the ages of 20 and 24 are either credit invisible or lack sufficient information for credit bureaus to develop credit reports. There's simply not enough data out there for lenders to make calculated decisions.

3. Traditional reports don't include monthly bill payment habits
Even accurate traditional credit reports don't deliver a complete review of a person's financial situation. Insurance payment obligations, medical expenses and even monthly bills all impact a person's ability to repay outstanding debts. Receiving this type of context entails procuring alternative credit reports that detail:

  • How consistently individuals pay rent and utilities.
  • How often persons have moved from one place to another.
  • Any tax liens or judgments under a customer's name.

By no means should loan officers disregard traditional credit data. Rather, they must augment this information with reports that provide further insight into people's financial situations. Doing so enables lenders to better estimate the risk associated with engaging certain customers.