How Lenders Can Harness Alternative Data to Help Overcome Today’s Economic Challenges

Increasing inflation, rising interest rates and stagnant incomes have made borrowing more expensive and meeting financial commitments more difficult. In fact, our recent data at Equifax shows that card utilization rates are increasing alongside increases in delinquency rates. As card utilization rates and delinquencies increase, lenders need to leverage alternative data and different scoring methods to help identify new opportunities. 

For example, in the U.S., 44 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 can 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. 

Alternative data also comes into play with credit invisibles, or people lacking a credit report or credit score. For these individuals, alternative data might be the only way to gain access to loans. Using these alternative data sources may give lenders a more robust picture of a borrower’s financial standing than a credit score alone. 

Extending credit to those with low - or no - credit scores - when done intelligently and with alternative data, opens 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.

To use alternative 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 alternative data if the lender chooses 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 even if they want to rely on alternative data alone.  

According to our research at Equifax, incorporating alternative data offers a range of valuable benefits:

• More applicants: 21% more applicants could be made scoreable when compared to a traditional credit score alone.

• Better informed decision-making: Up to 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 alternative data is used in combinations 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 can 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 credit histories, but who may have a history of late utilities payments. This due diligence protects 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 inclusive lending. Want to learn more? Email the risk advisor experts at riskadvisors@equifax.com.