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What Is Alternative Credit Data (and Why Is It Important?)

What Is Alternative Credit Data (and Why Is It Important?)

The traditional model of credit scoring by the big credit bureaus weighs a known set of factors, such as payment history and total debt. Businesses use this information to decide if they'll offer credit and under what terms.

This approach works great for people who started building a credit history with loans and credit cards early on. Unfortunately, more than 25 million people in the US fall into a category called credit invisible. That means they don't have any of the normal stuff that shows up on credit reports.

Enter alternative credit data. Not sure what alternative credit data is why it matters? Keep reading for our quick guide.

What Is Alternative Credit Data?

Let's say that you skipped the whole college experience and went right into the workforce. You decided early on that you'd live within your means. You live in an apartment you can afford and drive a used car.

You save your money bit by bit until you can afford a down payment on a small house. You go to the bank to get a loan. They turn you down because you're a credit non-entity.

For the bank or any other business, there is simply no readily available way they can evaluate you. Alternative credit data is all that information about rent payments, utility payments, and other adult responsibilities that go unnoticed on a credit report.

Alternative Credit Score

Why Would You Use an Alternative Credit Data Source?

Let's say that you run a business and you're of a mind to extend a limited amount of credit to your customers. One of your customers that you know handles their money responsibly applies for credit. You're shocked when you discover they're rejected because of their nonexistent credit profile.

Using an alternative credit data source lets you make a credit decision based on a more complete profile of the applicant.

Why Is It Important?

What makes alternative data in credit such an important issue? A lack of an obvious credit history doesn't make someone a bad bet for credit.

In fact, it might even indicate that they're a better bet for credit since they know how to live within their means. It would likely never cross their mind to apply for credit they didn't know they could afford.

Alternate data lets you access that credit invisible group of people and make informed decisions about whether you can trust them with credit.

Alternate Credit Data and Your Business

Alternate credit data isn't the right evaluation tool for everyone. If someone has a regular credit history, that's a solid indicator of how they'll treat future credit.

If you deal with people who possess no normal credit history, though, using alternate data can open the door for an ongoing relationship between you and the customer. If you extend credit when no one else will, you'll probably secure a customer for life

Microbilt specializes in alternate credit data and risk management. If you think that your business can benefit from using alternate credit data, contact Microbilt today.