Alternative credit data: The key to understanding the credit invisible

The credit invisible are any individuals without data filed in nationwide credit reporting agencies. They may be immigrants whose foreign credit scores don't apply in the U.S., millennials wary of traditional credit products, or individuals who simply have difficulty accessing credit.

In 2015, the Consumer Financial Protection Bureau discovered there are 26 million Americans who are credit invisible. That's a huge loss for lenders, who depend on traditional credit reports to assess people's ability to repay loans.

Using alternative credit data to reach the credit invisible
Those designated as credit invisible are financially active, however. They pay rent, utilities, phone bills and other monthly expenses. Companies specializing in alternative credit data products include these transactions in their reports, tracking how diligently people settle financial obligations.

The question is, does rent and utility data provide lenders with enough context to predict individuals' creditworthiness? PERC, a company that provides information to drive solutions, analyzed consumer credit data, utility and telecommunications payment histories and debt settlement outcomes between July 2009 and June 2010 to determine the efficacy of using utility and telecom payment histories to assess creditworthiness. The study discovered the following:

• Of consumers with active bank cards, 10 percent had 90+ days past due (DPD) notices. One quarter of those individuals had 90+ DPDs of 25 percent on their utility and telecom accounts, but this information isn't included in traditional credit scores.
• More than one-fifth (22.3 percent) of homeowners who had serious utility and telecom delinquencies had mortgage delinquencies.

These and other findings demonstrate the value of using alternative credit data to inform lending decisions. PERC's analysts concluded that if lenders consider utility and telecom information either in conjunction with or separately from traditional credit scores, they could expand their crediting businesses by 5 percent without incurring additional risk.

Expanding access to credit
Utilizing alternative credit data benefits not only lenders but also borrowers. In a separate study, this one conducted in 2012, PERC discovered those with thin-file credit reports had their scores increase 25 percent after bureaus included alternative credit data.

One of the biggest testament's to alternative credit data's usefulness is that it enables lower-income individuals with thin-file or no-file credit reports to acquire wealth. Property, appliances and other goods increase people's standard of living, enabling many to rise out of real poverty. PERC found that, as a result of lenders analyzing alternative credit data, credit acceptance rates among Americans earning less than $20,000 a year rose 21 percent. In addition, loan approval rates rose 14 percent among people earning between $20,000 and $30,000 per year.

Using alternative credit data does not involve lowering standards to provide loans. Rather, the information provides additional context regarding people's financial situations. Reaching individuals with either thin or no credit reports requires this level of thoroughness.