Higher interest rates, increasing inflation and stagnant incomes have made borrowing more expensive and meeting financial commitments more difficult. In fact, recent data from Equifax shows that credit card utilization rates have increased year-over-year, alongside increases in delinquency rates. Additionally, the recent Equifax data shows that total consumer debt continues to rise, totaling $17.33 trillion as of January 2024, up 2.3% year over year. As card utilization rates and delinquencies increase, lenders can leverage alternative data and different scoring methods to help identify new opportunities as well as hidden risks.
For example, in the U.S., 45 million households rent their homes. If renters reliably pay utilities, they don’t always have the benefit of having that reflected in their credit scores. Incorporating alternative data such as on-time utility payments may help reveal a more holistic picture of a borrower’s finances and help open new markets for lenders. A lender might be unlikely to approve an applicant based on a credit score of 600 alone but on-time utilities payments may be good indicators of repayment likelihood and could potentially change that decision in the borrower’s favor.
Additionally, as consumers live with the higher cost of goods and services plus more normalized savings accounts, they may look for ways to maintain their current lifestyle. Available credit on cards as well as more nontraditional alternatives such as payday loans and short-term finance loans are ways to meet day-to-day necessities. Credit card usage shows up on a traditional credit report, payday and short-term financing loans may not.
According to a recent Equifax data and analytics report, there is an increase of consumers in the “Prime” and “Near-Prime” space of up to 14% when alternative data is layered into a credit strategy that also leverages traditional credit data. Many consumers use specialty finance loans to improve their finances when they don’t have access to lower-interest loans, eventually becoming eligible for lower-interest loans.
Lenders should be open to looking beyond the traditional avenues of consumer behavior to get a more holistic view of how their applicants and customers are leveraging credit. Those that manage risk most effectively may be in better positions to compete than their peers and in today’s competitive environment, lenders need every edge they can get to be successful.
Alternative data also comes into play with credit invisibles, or people lacking a credit report or credit score. For these individuals, leveraging alternative data might be the only way to assess their creditworthiness and enable access to loans. Using these alternative data sources may give lenders a more robust picture of a borrower’s financial standing than a traditional credit score alone.
Extending credit to those with low — or no — credit scores, when done intelligently and with alternative data, may open up a new wave of potential borrowers and lending opportunities. There is a large market of people needing to be served, mainly those who have been left out of the traditional financial system.
Read more about alternative credit:
- How Alt Consumer Credit Data Increasingly Supports Lending Decisions
- Marketing in a World of ‘Infinite Data’
To use alternative credit data, lenders must first obtain it, and then incorporate it into their models and loan-approval decision process. It’s possible to use a “ready-made” score that incorporates all alternative credit data sources rather than using multiple scores or sets of attributes that can be cost inefficient and/or difficult to use. Lenders can choose to layer this into their process. They can also choose how much weight they want to give alternative credit data vs traditional credit report data — or if they even want to rely on alternative credit data alone.
Depending on the objective: book more loans, reduce delinquency, or increase utility; the inclusion of alternative credit data can enable these outcomes. One example is a first time buyer’s program. The consumers targeted in this type of program often have limited credit histories and income. Going beyond a traditional risk score and base income requirement may provide a more holistic picture of the applicant that allows such a program to succeed. Companies can also align business objectives with helping people live their financial best by offering a first time buyer program that minimizes loss exposure through more targeted line assignments that are a better fit to the risk profile.
Incorporating alternative data may offer a range of valuable benefits. For example, OneScore from Equifax enables:
● More scorable applicants: 21% more applicants could be made scoreable when compared to a traditional credit score alone.
● Better informed decision-making: 10% KS lift when compared to a traditional score, enhancing the ability to identify high risk consumers who should be swapped out.
● More approvals: Up to 15.5% more applications can be approved when OneScore is used in combination with a traditional risk score while mitigating the amount of additional risk taken on.
● Real-time financial insights: Alternative data sources such as consistent on-time utilities payments may provide an up-to-date view of a borrower’s true financial health and habits.
● More complete view into risks: By utilizing alternative data, lenders can gain insights into risk factors that may not be evident in applicants with good traditional credit histories, but who may have a history of late utilities payments. This due diligence helps protect lenders from risk and safeguards borrowers from excessive debt.
Alternative data may open doors for individuals with limited or no credit history but stable incomes and on-time utilities payments. Establishing a credit history and joining the financial mainstream could help individuals potentially qualify for a loan, providing an immense opportunity for more inclusive lending.
Dave Sojka is a risk advisor at Equifax. He has over 25 years of experience in the financial services industry, at companies such as Household Finance, Household Retail Services, CitiCard, Alliant Credit Union, and Check Into Cash. He also spent over a decade at TransUnion in the Analytic Services group helping customers leverage scores and attributes through the use of segmentation strategies.