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The Credit Invisible Won't Be Invisible for Long

Jun 30, 2017 Walt Wojciechowski

The Credit Invisible Won't Be Invisible for Long

The credit market is shifting, and creditors who fail to change with the times will be left behind. In recent years, alternative credit data - culled from places like electricity and smartphone bills - has helped the credit invisible masses come out from the shadows and obtain credit products once beyond their grasp. To those creditors still only using traditional credit ratings, now is the time to consider the benefits of leveraging alternative credit data when assessing risk and assigning interest rates to prospective consumers.

The future is paved with alternative credit data

In brief, alternative credit data and related products make the most sense for the next generation of lendees. But if the naturally expanding population of credit invisible individuals isn't evidence enough that the current credit system fails far too many and needs replacement, other catalysts are at play, such as modern billing habits. According to a study conducted by ACI Worldwide and Aite Group, U.S. consumers paid 8.2 billion bills online in 2016. That's 56 percent of all billing activity in the country. Moreover, about one-third of those bill payments were recurring. It stands to reason that as more Americans leverage autopay features and more alternative credit products come to light, consumers will begin to connect the dots between the two. Autopaying bills can act as an engine for improving their credit score without fuss or oversight. Interestingly, that same study found that younger generations of bill payers were more likely to pay for bills with a debit card than with credit, further demonstrating how consumers are breaking with traditional models for building good credit scores.

Alternative credit data may eliminate loan stacking risks

Creditors are also driving the alternative credit revolution as they seek more intelligent risk reduction methods when vetting borrowers.

"In 2015, $18 billion worth of loans originated online."

One threat creditors wish would disappear is loan stacking, where borrowers gather several small loans when their credit history - or lack thereof - cannot afford them one large loan. Obviously, this is done without the knowledge of the creditors involved. Loan stacking not only hurts traditional lenders but also online lenders, where $18 billion worth of loans originated in 2015, according to Reuters. Ostensibly, the use of alternative credit data does away with this risk in two ways. First, it creates a system by which borrowers, including credit invisible ones, can meet the scoring benchmarks creditors require for affordable large loan products, thus preventing the need to stack smaller ones in the first place. In addition, a network of alternative credit data gives creditors yet another tool to assess and measure risk, not to mention greater transparency into whether the borrower in question already has a loan from another lender. The credit invisible won't be invisible for much longer. For lenders to capitalize on this wave of consumers, however, they will have to lead the charge into the next era of credit in the U.S.