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Financial Services | Fraud & Risk Management

Alternative Credit Data: Under-Reported but Vital


It is all too easy for most financial institutions and even some individuals to define a person by their FICO credit score. This is the three-digit score that has come to take over the planet as the definitive measure of one’s creditworthiness. The problem with this is that there are many flaws to boiling someone’s financial life down to a simple three-digit number. Yes, it might be easy to comprehend on the one hand, but it is severely lacking in detail and may not tell the whole story at all. This is where alternative credit data comes into play.

Understanding a Deeper Risk Portfolio

The average person on the street has never heard of the term “alternative credit data.” This is because it is still underutilized by many traditional institutions that prefer to remain stuck in an old model of doing business. They seemingly can’t get their heads wrapped around the idea that there may be better ways to look at an individual’s creditworthiness beyond what we have been sold up to this point. Take a look at how Forbes.com described this frustrating situation:

Slow adoption of alternative credit in the lending process has not been due to a lack of proof in its value or even consumer willingness to share such information. Utility bill payment history has been shown to provide a 60% lift in credit approvals for near-prime consumers by the Center for Financial Services Innovation. And 70% of Americans say they would share more personal data if it would lead to fairer credit decisions.

This means that even though many Americans say they are more than happy to share personal data to obtain more equitable credit terms, it is not yet happening on a wide scale. That said, in the places where it is happening, it seems to be engendering both happier borrowers and happier lenders. It is providing both sides of the transaction additional clarity that they simply did not have before. This means that lenders may capture a broader segment of the market that they may have simply overlooked before due to underperforming FICO scores.

Weeding Out the Truly Undeserving Borrowers

Alternative credit data is often heralded for its ability to open up credit markets to those who might have been turned down by lenders in the past. On the flip side of the coin, it can also protect lenders from borrowers who are truly not as creditworthy as their FICO score suggests. At this time, FICO credit scores are at some of their highest averages ever recorded, and this makes it difficult to determine who is actually deserving of their high FICO score and who may have simply benefited from economic conditions being as strong as they are right now.

Alternative credit data can pull from other life factors that can play a role in how likely someone is to pay back a loan that they borrow. One example of this is when utility bill payments are pulled as part of the alternative credit data. These records don’t show up on a FICO score, but they can appear in an alternative credit report. This is useful because it shows how well the prospective borrower is keeping up with their payments on some of life’s essentials such as their utility bills. These are insights that might otherwise be missed were it not for alternative credit data.

The Future of Borrowing

Although alternative credit data is just starting to get a foothold as an accepted concept in the financial world, it is anticipated that it won’t be long before this lending practice is clearly preferred over outdated methods from the past. In fact, many believe that the number of factors that can be measured in the data profile of any individual is so vast that credit decisions going forward can only continue to get much smarter and much more targeted. It just makes sense that lenders would like to tap into as much information as they can before lending out to anyone, and that is very likely the direction that the financial world will take.

For all the latest information about the changing credit landscape, please contact us for updates.

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