Expanding The Traditional Credit File With Alternative Data

Tuesday, 27 February 2024, 9:36 am
Press Release: Hugh Grant

In today’s economy, it is paramount that people of all backgrounds and financial situations are able to have an opportunity to achieve financial freedom. However, with a traditional consumer credit file, many people are unscorable or have a very thin file. In order to combat this, alternative data can be used to provide a broader view of consumer behavior, helping businesses to make better decisions.

Alternative data is defined as information that is not included in traditional credit, which often does not tell the full picture of a consumer and their lives. Examples include specialty finance data, telco data, and utility data. Including this payment data has the power to score up to 32% of previously unscorable consumers.

Nearly 1 in 3 adults in the United States have thin files or are credit invisible. There are several reasons why some consumers may struggle with accessing credit. Studies have shown that nearly 76 million Americans have little to no credit history, with 61 million having a “thin” file, and the other 16 million with no credit history at all. Regardless of whether one is credit invisible or just has a thin file, holding this status can be detrimental to one’s financial stability. Those with little to no credit history are more likely to be young or new to credit usage, have recently immigrated, been recently widowed or divorced, or have other special circumstances.

Being considered credit invisible can be very costly. In fact, a subprime credit score could bring an additional nearly $33,000 in interest on a mortgage compared to a prime score. This plagues many Americans, as 57% of people report being unable to pay an unexpected expense of this nature from their savings. A shocking 1 in 3 Americans also report having more credit card debt to their name than emergency savings.

Leveraging alternative data with artificial intelligence has the power to shift 8.4 million more consumers in the United States into scorable credit bands. The more information that is included in and considered for a credit file allows for the expansion of a more inclusive economy. This ensures that millions of Americans who were otherwise unscorable can now have a shot at financial freedom. Under these new guidelines, an incremental 2 million more consumers could qualify for prime or greater offers.

Layering on specialty finance data could score an additional nearly 2 million people, equating to 7% of credit unscorables. More significantly, utility and telco data can help an additional 6.5 million people to become scorable, equating to 25% of credit unscorables. This is because over 90% of American adults have at least one utility bill in their name, which makes this a very universal indicator of financial activity and responsibility.

Unlocking new economic potential through alternative data is the future of credit. It is important to foster a more inclusive economy as more and more people are starting to seek financial opportunities in their own lives. Gone are the days of using traditional credit data to determine the responsibility of a consumer. With alternative data, companies can gain a better idea of the lives of credit holders, helping to understand their financial story and their unique needs. Those who were originally considered invisible by most financial institutions can use this data to prove their ability to handle this financial responsibility outside of the usual indicators of this status. Although traditional credit reports are still a strong indicator of credit history and past financial reliability, alternative data can expand access to credit and support a more inclusive economy in a time when we need it most.

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