Using alternative data to better gauge borrower risk
The COVID-19 pandemic has created a difficult economic reality for millions of Americans. Whether due to job loss, limited working hours or illness, people are facing an entirely new set of financial challenges. This rings especially true for more than 45 million credit invisibles living in the U.S. – people who were excluded from the credit ecosystem prior to the pandemic due to job loss, divorce, a lack of financial experience or other reasons.
An established credit history can save people thousands of dollars over a lifetime and is the gateway to financial opportunity in America. While we are certainly in uncharted territory with COVID-19, the impetus for supporting consumers’ financial health and maintaining access to credit is the same it has been for many years: alternative data.
The current financial picture has accelerated the need to allow responsible borrowers to better prove their creditworthiness and to empower lenders with the ability to more accurately assess risk. At the same time, improving financial access for thin-file and credit invisible consumers will play an integral role in our road to economic recovery. Now, likely more than ever in our history, integrating alternative data into lending decisions is critical.
Data that drives financial inclusion
While traditional credit data has proven to be an effective means for identifying creditworthy consumers, there is a large percentage of people who are excluded from the credit economy because they lack a traditional credit history. At the same time, Experian research shows three out of four consumers believe they are a better borrower than their credit score represents.
Technology and data continue to revolutionize the world around us. When used correctly, these tools have the power to transform millions of lives for the better.
Today there are new, Fair Credit Report Act (FCRA) compliant forms of data that reflect a borrower’s creditworthiness and can support sound lending decisions. Incorporating these new data assets – such as consumer permissioned data, trended data, alternative financial information, rental data and full file public records – into decisioning improves access for consumers who are excluded from the traditional credit ecosystem, but who can fulfill their financial obligations and pay responsibly. This segment of the population plays an important role in recovering the economy.
For example, knowing how a consumer is managing credit at a single point in time only tells part of the story. By looking at historical payment information through trended data attributes, we can see how a consumer uses credit and pays back debt over time to create a more accurate risk profile.
Similarly, someone without a credit card or loan tradeline on their credit report may be making consistent, on-time payments for things such as their cable, utilities, mobile phone or Netflix service. These payment histories can demonstrate that an applicant can afford to repay a loan they’ve applied for, even in the absence of enough traditional financial information. By empowering consumers to contribute their on-time payment histories, a clearer picture of financial responsibility and management is created.
Not only are consumers willing to share additional information in exchange for improved credit access, 96 percent of lenders see its value and believe alternative data, including consumer permissioned data, allows them to more closely evaluate consumer creditworthiness in times of economic stress. Empowering consumers to contribute their on-time payment histories can lead to new financial opportunities without additional risk. This is a win-win scenario.
Looking at information not included in a traditional credit report is not a new practice, but the time for incorporating these predictive attributes into every day decisioning is now. Leveraging alternative data, including consumer permissioned data, will be key for lenders as they prepare for an influx of consumers requiring financial support once the current financial accommodations are lifted.
While an established credit history is the gateway to financial opportunity in America, alternative data is the gateway to creating meaningful impact in the financial services industry and our nation’s economic recovery against the backdrop of COVID-19.