Exploring Why Millennials are Turning to Alternative Credit Scores
About 45 million consumers are credit invisible or have unscored records. Many of them are young people under the age of 29. For example, around 20% of those aged 20 to 24 years are invisible to the financial system, while 11.5% have unscored credit records.
Millennials and young people, in general, often find it difficult to access financing. Even if you have a stable job, you may still not be able to get a loan. That's where alternative credit scores can make all the difference.
Traditional credit scoring models are severely flawed.
FICO, for instance, doesn't take into account your job situation, income, rent payments, or the properties owned. Alternative credit, on the other hand, provides a more complete picture of your finances and spending habits.
Considering these aspects, it's not surprising that Millennials are turning to alternative data sources. Here's what you should know about it.
Conventional Credit Scores Have Major Flaws
FICO and other credit scoring systems only look at your credit behavior. Generally, lenders use five factors to determine the creditworthiness of potential customers:
- Payment history
- Length of credit history
- The amount of debt
- Recent hard credit inquiries
- Types of credit used
The problem is that many of these factors don't apply to the modern consumer.
For example, 36% of Millennials have never had a credit card. Unlike older generations, they view most banks and credit card companies with distrust and prefer to use prepaid or debit cards.
Traditional lenders decline customers with no credit history. But even so, building credit is no longer an incentive for Millennials.
Many of them would rather wait to save money and pay in cash for the things they want or need. Oftentimes, they use digital services like PayPal and Revolut to access credit lines.
Millennials with any financial literacy know that building a credit history is crucial for buying a house, among other things.
However, they are often more concerned about the rising interest rates, hidden fees, or cybercrime. Not to mention the risk of data breaches, a problem that affects millions of customers each year.
Is Alternative Credit a Better Option?
More and more lenders are considering alternative data from noncredit sources. They may factor in customers' cell phone and rental payments, property records, salaries, job history, or education. Some might even check your blockchain accounts and social media footprints.
Alternative credit scores can provide better insights into a customer's spending and saving habits.
For example, if you're paying your bills on time and have a steady income, you'll likely pay off your loan too. The same goes for young people who have a stable job or lucrative side gig, pay for gym memberships, and stay on top of their rent payments.
In today's digital era, alternative credit data is more relevant than conventional credit scoring. Lenders have access to massive amounts of data that can be used to evaluate customers and determine their ability to pay.
Find Out More About Alternative Credit Scores
Just because you have no credit history doesn't mean you can't take out a loan or mortgage. Alternative credit scores can help you get the money you need when you need it.
First, register on Connect. Next, our team will collect, analyze, and store your bill payment information and generate a free alternative credit report. As a registered user, you can access your report anytime you want.
Join Connect today or contact us to learn more about alternative credit scores!