Expanding Access to Credit with Alternative Data
Access to mainstream financial services requires new insights into individual finance history. Many Americans today have little to no credit due to various reasons, and this can lead to difficulties getting loans and can lead to higher rates on insurance. So what are the reasons so many people in the country have low credit and what is the solution?
1 in 5 adults in the U.S lack the credit history needed to establish a credit score. 67 million Americans have a thin credit file–meaning they have four or less accounts– and 25 million are considered completely credit invisible. 63 million of these consumers with low credit are also under banked. This lack of banking as well as lack of credit means that consumers have to rely on high-cost alternative financial products and services such as check cashing or pawn shops.
There are many reasons that consumers can have little-to-no credit history. Oftentimes younger people or people who are new to using credit can be intimidated by starting new accounts or not sure where to even start. Other consumers may not use credit accounts or be cash or debit card users. Still others can be recently widowed or divorced and be left to deal with their own finances for the first time in years!
These various reasons for credit invisibility can be costly to consumers. Subprime credit scores can bring up to $30,000 more in interest on an average thirty year mortgage compared to a prime score. Credit invisibility can also bring higher interest rates on personal loans and higher premiums for auto, home, and rental insurance. These financial consequences aren’t fair considering the reasons that most consumers are credit invisible, so what is the solution?
Leveraging alternative data could move 20 million more U.S. consumers into scorable credit bands. 21% of credit thin or invisible consumers could become scorable and 18% could qualify for prime or near prime offers. There are many forms of alternative data that can be used, and all data that is used is consumer permissioned meaning that consumers can choose what information is leveraged with their credit score.
One example of alternative data that can be used is rental payment data. Many landlords perform credit checks as part of the leasing process, but rental data is not included in credit reports. 51% of consumers believe it would be helpful to have rental payment information included in credit reports. On time payments would show that a person is financially responsible in the same way credit information does.
Another form of alternative data is the work number database. Employment and income verification can assess U.S consumers’ ability to pay. If the work number database was used in credit decisions it could move more than 7M people into prime or super prime categories. In fact the work number service fulfilled 223M verifications for consumers in 2020 alone.
Credit is important for making big purchases such as cars or homes for many Americans. It is important that the opportunity for prime scores are available for people even with limited credit history. The leverage of alternative data can provide the opportunity to access mainstream financial services for the credit invisible population in the U.S. today.
