Choosing Between Traditional and Alternative Credit Data Systems

Traditional credit measurements have been in place for hundreds of years. While these tried and true practices have allowed many to qualify for essential needs, these practices may be discriminatory and outdated. Alternative credit data paints a broader picture of an applicant’s financial health, education, and the gauge of creditworthiness. With advancements in financial technology services, lenders can now use alternative data, helping to create a wholesome picture of the creditor’s financial health.

Supplemental data gives lenders additional information to reach a wider audience and make more informed decisions with their services. With more data, alternative credit policies can streamline the underwriting process with a broader amount of information to draw upon. Read on to learn more about alternative credit data and how it advances the financial and lending markets.

What is alternative credit data?

The data lenders utilize to determine creditworthiness is regulated by the Fair Credit Reporting Act (FCRA-regulated data). With alternative credit data not conventionally included in most credit reporting, it must meet the FCRA regulations of being correctable, displayable, and disputable. With more lenders switching from traditional to alternative credit data, it’s essential to learn the available options. Some of these include;

Alternative financial services (AFS) data – This may include:

  • The consumer’s auto title loans
  • Single-payment loans
  • Rent-to-own arrangements
  • Small-dollar installment loans.

Buy now, pay later (BNPL data) – Shows payment and returns histories and pre-scheduled payments.

Rental payment history – Can be rent payment history as shared by different sources, including electronic rent payment services, property managers, and rent collection institutions.

Consumer permission data – Data used to generally evaluate assets, income, and cash flow. The lender needs to first seek the creditor’s consent before acquiring some of this data.

Full-file public records – Lenders can use data regarding a consumer’s education, address history, property deeds, and occupational licenses.

All the above-mentioned sources of data help paint a complete picture of a consumer’s creditworthiness. As a result, this can help expand a vendor’s market reach and service delivery and prevent common fraud cases.

Advantages of alternative data in credit underwriting

Using alternative credit policies and underwriting houses numerous benefits for all parties involved. Some of the clear benefits include the following:

  1. In-depth consumer data and information

Data like a consumer’s payment history is rarely included in extensive detail on traditional credit reports. Using alternative credit data helps lenders learn more about their consumer’s actual financial standing.

Having a deeper analysis of a consumer’s credit report allows for more significant data reasoning and predictability of future behaviors. Valuable data gleaned during the underwriting of alternative data enables targeted engagement strategies that are both efficient and fair. The engagement strategies greatly encourage enhanced collection plans, later on raising delinquent conversion metrics, reducing losses, and recognizing valuable consumers. 

  1. Improved financial inclusion

Traditional credit data has been in use for a long time, unchallenged. Acting almost as an exclusive club, millions of Americans are deemed technically non-scoreable. As alternative credit data uses information from multiple sources, lenders can utilize this information to expand their reach while comfortably managing risk.

  1. Faster and better credit decisions

More data can facilitate more rapid and informed decisions, benefiting all parties involved. Creditors can access loans and financial aid quicker, and lenders can dispense loans with greater certainty of the consumer’s ability to make consistent payments. Added information can reduce unnecessary risk and uncertainty during the lending process.

Lenders are among the leading investors in alternative credit data systems. Its use in underwriting has showcased the importance of alternative credit data systems. The benefits of this system far outweigh traditional credit data, and it is only expected to rise in popularity with additional improvements and implementation.

Sources

2020 State of Alternative Credit Deck by Experian.