Want to Get Approved for a Loan? Try Alternative Credit Scores
More than 20% of American consumers have been turned down for credit in 2020. Rejection rates were highest among millennials. Lenders have tightened credit standards, making it harder to get approved for a loan.
Banks can reject loan applications due to bad credit, low income, or excessive debt. Sometimes, their decision relies on internal policies. Your employment history matters, too.
The good news is, you can increase your chances of approval by building up your credit history and paying off debt. Consumers may also be able to improve their credit scores through alternative data, such as rental payment history.
But what is alternative credit scoring and how does it work? Read on to learn more about this service and its role in the loan application process.
What's Wrong with Traditional Credit Scoring?
Banks and lenders started to use credit scoring systems in the '50s. This allowed them to assess loan applications based on specific criteria rather than subjective factors.
Today, financial institutions still use credit scoring. They take into account a customer's age, debt-to-credit ratio, credit history, and other data to determine his eligibility for a loan.
Unfortunately, this system has major flaws.
For starters, about 26 million U.S. consumers are "credit invisible," reports Forbes. Even those who pay their bills on time and have a stable income may not qualify for a loan. The same source states that credit scoring perpetuates racial injustice.
Moreover, credit reports are riddled with errors. This problem affects more than one in five consumers, ruining their chances of getting approved for a loan.
What Is Alternative Credit Data?
Rental payments and other alternative data can tell a lot about consumers' creditworthiness. These factors are often more relevant than a consumer's age or credit history.
Let's say you have a good job and pay your bills on time. At some point, you decide to apply for a mortgage, but your application is declined because you have no credit history. That's where alternative credit scoring can help.
More and more lenders are looking at alternative data when evaluating loan applications. This may include a consumer's shopping history, rental and utility payments, asset ownership, and more. Such information can improve credit scoring accuracy, leading to better lending decisions.
Alternative data can make it easier for first-time borrowers, freelancers, and underbanked consumers to access credit. At the same time, it improves risk modeling.
These new credit scoring systems can open up new doors for unbanked or underbanked consumers. They could also improve the fairness of credit scoring and provide better insights into consumer behavior. It's a win-win for both consumers and lenders.
Get Approved for a Loan Today
Alternative credit scoring takes into account several factors other than your credit history. Lenders may look at your property records, purchase history, utility payments, and more. This can be particularly helpful for consumers with no credit history, such as young adults.
With this new credit scoring model, you can get approved for a loan faster and more easily. Register on Connect today to see your alternative credit rating for free!