Alternative Data as a Means for Making Credit Decisions

A 2017 report from the Consumer Financial Protection Bureau (CFPB) maintains that an estimated 44 million Americans have little to no credit profile.  This lack of credit can make it impossible for consumers like this to gain access to traditional credit opportunities.

Alternative credit data has been identified as a way for information not found in traditional credit reports to be used to evaluate consumers when making lending decisions.  This includes information such as utility bill payments, cell phone bill payments, and rental payments.

Alternative credit data for credit scoring is intended to expand the credit file of consumers widening the population of those who can access the credit markets.

This can be especially helpful for groups who are typically considered to be “credit invisible” such as low-income families, immigrants, and younger consumers.

A CFPB study also found that consumers living in low-income areas were 240% more likely to become credit visible as a result of negative events such as late or nonpayment of bills as opposed to a first credit card than those who live in more affluent areas.

Alternative credit data is considered to be a reliable data source for lenders to use when making credit decisions by the Equal Credit Opportunity Act (ECOA).

Companies like Deserve are using data like bank account information to predict the likelihood of repayment when issuing its credit cards.

In most cases, Social Security numbers are not necessary and connecting social media accounts can be used to increase credit limits.

The big three credit bureaus are also starting to get in on the action.

FICO Score XD and FICO Score XD 2 scoring models have incorporated utility bill and cellular bill payment information into their analysis.  They are also purchasing alternative data companies as a way to help them to understand how alternative data can be incorporated into financial scoring models.

For example, Experian purchased Clarity Services, which collects data from small value lenders such as auto finance companies and other account information typically not found on credit reports.

Alternative credit data can be a helpful tool in evaluating your creditworthiness when traditional methods are lacking.

If you have any questions about how alternative credit data can be used in lending decisions, or you would like to learn more about our services, please feel free to contact us for more information.