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4 advantages of alternative credit scores

Dec 10, 2018 Sean Albert

4 advantages of alternative credit scores

Millions of Americans are deemed to have insufficient credit histories and thus don't have credit scores, but new alternative methods are making it possible to create these rankings, even with limited repayment backgrounds. Nontraditional strategies have emerged in recent years, reflecting the tendencies of millennials and enabling them to be more accurately defined in terms of credit.

This trend has increased opportunities for student loans, startup funding and other previously underserved lending initiatives. Below are just several of the advantages alternative credit scoring can provide.

1. Consumers who were considered "high-risk" can be appropriately scored

Urban Institute noted that many Americans cannot generate credit scores because they lack comprehensive repayment histories. However, the source asserted that, through the use of alternative data that compiles supplemental information for individuals such as rent, utility and cellphone bill payments, as many as 40 million of those previously "invisible" people can now be accurately defined. This demographic, historically considered to be "high-risk," can now be more accurately measured. Even if they do not have a broad history of repaying auto, home and student loans, members of this group are now afforded access to a score, which can potentially help them obtain a loan with greater ease.

2. Peer-to-Peer lending can assist businesses with no credit history
A Research and Markets report found that a new area in alternative lending is P2P, which allows new and small businesses to receive funding without having to seek a traditional loan. This method can provide startups and people with poor or no credit history with necessary funding to temporarily remain sustainable. Since applicants do not have to deal with a bank or traditional lender, they can expedite the process of securing the loan and remain financially viable while they attempt to grow. Repayment flexibility that is often allotted to borrowers in this case can be particularly appealing.

3. The P2P lending platform is experiencing huge growth
The Research and Markets study noted that the P2P market is undergoing constant expansion, and is expected to reach $350 billion by 2025. The platform first appeared in 2005, and caters specifically to underserved people and companies who need short term financing to stay above water. Consumer, student, real estate and small business loans are very common in this field. The source said that borrowers can experience higher levels of convenience, lower repayment rates and increased transparency when compared to traditional loans.

4. Alternative data can also benefit those who do qualify for traditional credit scores
People who do have credit scores can also benefit from alternative methods of measurement, according to Urban Institute. Since nontraditional scoring takes into account various additional payments, this can provide new insights into existing credit scores. This allows lenders to extend more options and offer better terms to borrowers, creating a more amenable experience for all parties involved. The source also remarked that even traditional lenders are beginning to use new data and analysis, marking a shift toward accessibility for loan-seekers.