Insights

What is Alternative Credit Data?

December 8, 2021
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Certified Credit

For most lenders, traditional credit data is the bedrock of their underwriting process. It encompasses the information found within Equifax, TransUnion, and Experian credit reports. While undeniably valuable, traditional credit data leaves out a lot of credit consumers.

After all, one in ten American adults is “credit invisible,” which means they don’t have a credit report.1 An additional 19 million people have credit files that are too thin to generate a credit score that’s high enough to qualify for a mortgage. This sizable group can struggle to get approved for financing, even if they manage their finances responsibly. While they miss out on financing opportunities, lenders miss out on valuable potential customers.

The solution to this predicament? Alternative credit data.

Alternative credit data gives borrowers more ways to showcase their creditworthiness to lenders. It also gives lenders a chance to tap into underserved markets of creditworthy, credit-thin customers. Additionally, these comprehensive reports can also help identify and prevent fraud and verify identity to reduce risk.

Traditional Credit Data vs. Alternative Credit Data: What’s the Difference?

Both traditional and alternative credit data give lenders insight into people’s creditworthiness. However, alternative credit data generally isn’t shown on standard credit reports and most lenders are overlooking an abundance of credit data.

Let’s take a deeper look into these two different types of credit data:

Traditional credit data

Traditional credit data includes the standard tradeline information shown within most traditional credit reports. This data includes a credit applicant’s:

        • Length of credit history
        • Loan history
        • Credit card limits
        • Debt repayments
        • Remaining credit balances
        • Credit account status
        • Credit inquiries
        • Public records, such as judgments and bankruptcies

This type of credit information usually gives lenders a reliable assessment of a borrower’s ability and willingness to repay their debts on time—that is, as long as they have an adequate credit file.

People with thin credit files are a different story. Their traditional credit data may be too limited to accurately illustrate their creditworthiness. For instance, someone might be fantastic with money, but their sparse traditional credit data doesn’t prove it. That’s where alternative credit data comes in!

Alternative credit data

Alternative credit data encompasses other potential indicators of creditworthiness and supplemental, Fair Credit Reporting Act (FCRA)-compliant credit data that aren’t shown on traditional credit reports. Some examples of this type of data include:

        • Rent and utility payments
        • Income and employment information
        • Asset and property ownership
        • Full file public records
        • Bank account information:
          • Age of accounts
          • Average balances
          • Withdrawal and deposit frequency
        • Alternative lending service inquiries:
          • Payday loans
          • Small-dollar installment loans
          • Point-of-sale financing
          • Auto-title loans
          • Rent-to-own loans
        • Other consumer-permissioned data

As you can see, this type of data can give lenders a more holistic view of an applicant’s financial situation. In turn, it can be used to supplement a thin credit file. When alternative credit data is taken into consideration, more financially responsible applicants can qualify for the credit opportunities they deserve.

Why Is Alternative Credit Data Valuable For Lenders?

Alternative credit data presents a clear benefit to borrowers—it gives them a chance to obtain loans and credit cards they may not qualify for otherwise.

But what about lenders?

When it comes to the underwriting process, the more data, the better. Alternative credit data gives lenders a wealth of information they can use to enrich their underwriting process and boost their bottom line. Here’s how:

#1 Alternative Credit Data Helps Lenders Identify More Creditworthy Customers

Lenders have to strike the careful balance of acquiring more customers while ensuring each one meets their strict standards of creditworthiness. As we mentioned before, applicants with thin credit files are often rejected due to their perceived risk. However, their perceived risk can be corrected with the help of alternative credit data.

By taking into account this data, lenders can identify more applicants who match the borrower profile they’re looking for. This data can help savvy lenders see opportunities where other lenders only see risk.

For example, an applicant may have a lengthy history of making their rent and utility payments on time. They may also have many assets and a healthy average bank account balance. Based on this information, lenders can safely assume that this applicant will be willing and able to repay their credit payments on time, even if they don’t have direct experience using credit.

As you can see, alternative credit data can help lenders expand their customer base in the credit-thin market while sticking to their creditworthy standards.

#2 Alternative Credit Data Can Bolster Lenders’ Risk Management

Alternative credit data can also give lenders a more comprehensive view of applicants’ risk that isn’t captured in traditional credit reports. It does so by shedding light on potentially problematic financial behavior.

For instance, an applicant may have a decent credit score and a low credit utilization ratio. However, they may also be utilizing an alarming amount of payday loans on the side. Or perhaps, they have a decent credit payment history, but they consistently make their rent and utility payments late. Alternative credit data can uncover these types of financial red flags about otherwise strong credit applicants. In turn, it can help lenders strengthen their risk management.

Whether an applicant’s alternative credit data helps them or hurts them, it always supports a lender’s ability to make smarter underwriting decisions.

How Can Lenders Access Alternative Credit Data?

Alternative credit data has a lot to offer. So how can lenders gain access to it?

Alternative credit data usually needs to be shared by consumers themselves. Fortunately, many consumers are more than happy to give their consent. Just take a look at these statistics from Experian:2

  • 70% of consumers are willing to share more of their financial details if it increases their chances of qualifying for a loan.
  • 48% of consumers would prefer that their utility bills be included in their credit history.
  • Roughly 40% of consumers would like to add their savings account transactions and mobile phone bills to their credit history.

Alternative Credit Data Tools: UltraFICO and Experian Boost

Many credit agencies are working on ways to integrate alternative credit data into their service offerings. For example, FICO and Experian have developed two solutions that empower consumers to make alternative credit data accessible to lenders:

UltraFICO

UltraFICO is FICO’s new credit scoring method that takes into account alternative credit data. It primarily focuses on bank account data.

By opting into the UltraFICO program, consumers can link up their checking, savings, or money market account information and have it factored into their UltraFICO score. In turn, their responsible bank account management can help them earn a higher credit score than they would otherwise. It can also help credit invisible individuals generate an UltraFICO credit score, even if they don’t currently have a FICO score.

To earn a high UltraFICO score, users benefit from having:

    • A healthy average checking account balance
    • A decent savings account balance
    • No history of negative bank account balances
    • No bounced checks or overdraft fees
    • A history of making their bill payments on time
    • A long history with their bank

Seventy percent of people who maintain positive bank account balances for several years can achieve a higher UltraFICO score than their traditional FICO score.3

Experian Boost

Another alternative credit data service is Experian Boost.4 This free service allows people to add their utility bills and telecommunication payments to their Experian credit report.

For example, an Experian Boost user could agree to share the following bills:

    • Streaming service subscriptions (such as Netflix, HBO, Hulu, and Disney+)
    • Internet, cable, and satellite subscriptions
    • Landline and cell phones
    • Gas and electric
    • Solar power
    • Water
    • Trash

As long as these bills are paid on time consistently, this alternative credit data can bolster borrowers’ Experian credit reports. In turn, it can boost any FICO or VantageScore credit scores generated from these reports.

Better yet, this alternative credit data can help credit invisible people establish a credit history from scratch simply by paying their bills on time—no credit applications required.

UltraFICO and Experian Boost are just two of the new services consumers can use to proactively share their alternative credit data with lenders. More of these types of services are cropping up every day.

Note: These services can only help consumers qualify for financing in certain circumstances. For example, UltraFICO and Experian Boost won’t impact an applicant’s FICO credit score if they’re applying for a mortgage. Hopefully, these types of alternative credit data tools will be able to do so in the future. 

Alternative Credit Data Is Innovating The Underwriting Process

Alternative credit data may be a newcomer on the credit scene, but it’s certainly here to stay. An increasing number of lenders are already taking advantage of it. By leveraging alternative credit data during your underwriting process, you can make better lending decisions and offer credit-thin consumers a more inclusive financing experience. As you acquire more creditworthy customers, you can take your lending business to new heights.

Certified Credit: Affordable Mortgage Credit Reports

Are you a mortgage lender looking for affordable credit reports? If so, Certified Credit can help.

Here at Certified Credit, we proudly serve mortgage brokers, credit unions, banks, and national lenders with our affordable credit services. We provide credit reports from the three major credit bureaus. We also offer a tri-merge credit report that includes data from all three.

Some of our other product offerings include:

  • Customer acquisition and retention tools
  • Third-party verifications
  • Fraud and risk support
  • Settlement services
  • Credit report tools
  • Money-saving strategies

Our customizable credit solutions can help you fortify your underwriting process and transform more applicants into valuable customers. Reach out to us today to learn more about our mortgage credit report services.

 

Sources:

1Consumer Financial Protection Bureau. Who are the credit invisibles?
https://files.consumerfinance.gov/f/documents/201612_cfpb_credit_invisible_policy_report.pdf

2Experian. What is Alternative Credit Data?
https://www.experian.com/blogs/insights/2018/09/what-is-alternative-credit-data/

3FICO. UltraFICO.
https://www.fico.com/ultrafico/

4CNBC. Here’s How Experian Boost Can Help Raise Your Credit Score For Free. https://www.cnbc.com/select/how-experian-boost-works/

5PERC. Research Consensus Confirms Benefits of Alternative Data.
https://www.perc.net/wp-content/uploads/2015/03/ResearchConsensus.pdf