Many Lenders Using Alternative Credit Data
Over the past several years there has been significant discussion regarding the role credit data plays in decisions made by lenders and credit card companies. More specifically, this back-and-forth has centered around which metrics carry the most weight within the broad spectrum of information that can be considered “credit data,” and whether information related to alternative credit has a place in all of this.
Lenders operating within traditional financial institutions like banks and credit unions typically shied away from alternative credit data, or at least claimed to, when queried in a public, formal context. However, research has identified this mindset has changed. This pivot could have major implications for the future. It's clear traditional lenders' perspectives on alternative data are positively evolving.
Majority of lenders using alternative data
A BusinessWire press release reported approximately 90% of lenders feel alternative credit data enables them to offer credit to more consumers. Furthermore, the research found 96% of lenders believe examining alternative data allows them to better evaluate a consumer’s “creditworthiness in times of economic stress.”
All things being equal, this wouldn't be particularly noteworthy—it would just exemplify due diligence. But because banks and traditional lenders so often stuck exclusively to FICO and other cut-and-dried credit models in the past, these institutions' deciding to factor another type of information into their efforts toward final decisions does represent a significant evolution in their perspective.
Answering the challenge of competition
Alternative web-based lenders emerged in the early and mid-2010s to fill the vacuum created by the drastically tightened lending standards of banks and traditional financial institutions after the 2008 global financial crisis. Unsurprisingly, they were fairly quick to try alternative credit scoring models. Having little to lose in the gambit, these alternative organizations, along with thousands of consumers and small businesses, ended up being some of the earliest proponents of programs like Connect.
Now, with traditional lenders beginning to regain some of their lost ground, it's natural they'd review the choices made by their upstart competition and see which ones they could adapt for their own benefit. Their past abundance of caution apparently notwithstanding, alternative credit data made the cut of new tools they felt were worthy of their use.
Future expansion of alternative credit
Not all the factors limiting the wider disbursement of alternative credit stem from company or lender actions. Some of this red tape relates to state and federal regulations regarding utility and phone bill statements, data from which is commonly used to calculate alternative credit.
Consumers overwhelmingly want this information considered by lenders. The aforementioned BusinessWire press release highlighted three of four consumers feel they are better borrowers than their traditional credit score represents. If given a choice, most people want alternative credit data sources, such as cellphone payment history (83%), utility bill payments (84%), and rent payments (80%), to be evaluated by lenders and creditors.
Alternative credit is recognized in the eyes of the law. Under the Equal Credit Opportunity Act (ECOA), lenders must evaluate proof of nontraditional payment history shared by consumers and, under the law, must take that alternative payment history into consideration when determining credit or loan eligibility.
Connect is a pioneer in alternative credit data. Since 2005 we’ve been empowering consumers to achieve a credit score by simply paying their routine bills. It’s easy! All you have to do is sign up for our service, use our free tools, pay your bills on time, and track your score. To learn more about earning an alternative credit score, Connect can help, contact us today.