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Major shift toward alternative credit scoring

May 01, 2015 Walt Wojciechowski

Major shift toward alternative credit scoring

The use of traditional credit scores provided by major reporting bureaus appears to be on the decline, as a wealth of economic and social catalysts have ushered in a proverbial new age of financial services and decision making. Although alternative lending and credit scoring could still be considered as being prominent figures on the fringe of the financial sector, mainstream efforts and adoptions are expanding rapidly and changing the face of several markets.

In addition to more common, widespread movements toward the use of alternative financial services, there have also been marked increases in the need for personalization, specialization and customization. These three matters can be seen in every walk of life throughout the consumer populous and private sector, and traditional financial services have struggled to keep up with these trends for years now, opening the gates for new entrants to arrive and thrive.

Why the shift?

Forbes recently listed several reasons why and indications of the growing prevalence of alternative financing and credit scoring, affirming that the most obvious catalyst for change traces its origins back to the Great Recession. In many ways, the financial crisis did indeed change the makeup of the banking, lending and credit scoring arenas in a somewhat rapid and perhaps even violent fashion, as a change was clearly needed to ensure the nation could recover.

According to the news provider, FICO scores are still the most commonly used by lenders in all categories, but there is likely to be a decline amid the increased need for more specialized credit reports among traditional and alternative lenders. For example, the source pointed out that the millennial generation - which will be the most prominent in the nation within the next decade by way of the workforce and consumer population - are choosing to not use credit cards.

Additionally, medical bills, collection practices and cash flow concerns were all cited by Forbes as stimulating a move toward alternative credit scoring.

Who else can benefit?
Whether it is a lender or a prospective borrower, alternative credit scores can help to make sense of more complicated histories and enhance decisions by each party in the loan application process. Rather than only using the highly standardized and somewhat misleading traditional credit scoring processes of the past, businesses, lenders and others should consider the merits of leveraging alternative options in the future.