6 Types of Alternative Credit Data for Better Loan Decisions

The future of credit scoring and alternative data sources

Alternative data is becoming increasingly valuable in the lending industry as lenders seek to make more informed credit decisions. In addition to traditional credit scores, alternative data types are being utilized to build a more complete borrower profile. This helps lenders gain a deeper understanding of an applicant’s financial situation and make better loan decisions. Let’s explore six types of alternative credit data that lenders are leveraging to enhance their lending practices.

Alternative Data vs. Credit Scores

Before we dive into the various types of alternative credit data, let’s briefly touch upon the difference between alternative data and credit scores. While credit scores have long been the standard metric for assessing creditworthiness, they have limitations. Credit scores are often a lagging indicator and may not reflect a borrower’s current financial state. Alternative data, on the other hand, provides real-time insights into an applicant’s financial health, supplementing or replacing traditional credit scores.

1. Up-to-date Information

One of the key advantages of alternative credit data is its ability to provide up-to-date information on a borrower’s financial situation. Unlike credit scores, which are typically refreshed only once a month, alternative data sources such as recent cash flow and account balances offer a real-time view of an applicant’s creditworthiness. This enables lenders to make more informed decisions based on the most current data available.

2. Added Convenience

Integrating with alternative financial data providers offers added convenience for both lenders and borrowers. By allowing applicants to log in to their online banking or payroll provider during the application process, lenders can access all the necessary data within seconds. This eliminates the need for manual documentation and streamlines the lending process. Importantly, utilizing alternative data in this way does not negatively impact an applicant’s credit score, unlike running a hard credit check.

3. Reduced Costs

Running a traditional credit check can be costly for lenders, with fees ranging from $30 to $50 per report. In contrast, pulling alternative credit data is significantly more cost-effective. In situations where lenders can rely solely on alternative data, this can result in substantial savings, especially at scale. By leveraging alternative data sources, lenders can reduce operational costs and pass on those savings to borrowers in the form of better loan terms.

4. Greater Insight

While a credit report provides information about an applicant’s past debt repayment history, it may not offer a comprehensive view of their overall financial health. Alternative credit data goes beyond traditional indicators and provides lenders with greater insight into a borrower’s current financial state. This includes data points that credit scores often overlook, allowing lenders to identify new risk factors and make more accurate lending decisions.

5. Ongoing Access

Alternative credit data can provide lenders with ongoing access to a borrower’s financial information. By digitally sharing consumer cash flow data, lenders can monitor any changes in income and make loan decisions based on the most up-to-date information available. This dynamic approach ensures that the borrower’s financial situation is continuously evaluated, leading to better-informed lending decisions.

6. Access for Thin Credit Profiles

Many individuals have steady incomes and asset profiles but limited credit history due to never having taken out a conventional loan. For these candidates, alternative credit data is crucial for accessing loans at favorable rates and building their credit history for the future. In the United States alone, an estimated 49 million people lack a credit score. However, when alternative data is considered, many of these individuals would qualify for a loan. Alternative data opens doors for these applicants, allowing them to access credit and improve their financial futures.

In conclusion, alternative credit data provides valuable insights into a borrower’s financial situation, giving lenders a more comprehensive view when making loan decisions. By leveraging alternative data sources, lenders can enhance their understanding of an applicant’s creditworthiness and offer more favorable loan terms. This benefits both lenders and borrowers, resulting in improved access to credit and better financial outcomes for all parties involved.

FAQs

Q: What is alternative credit data?
A: Alternative credit data refers to non-traditional sources of information used by lenders to assess a borrower’s creditworthiness. It includes data such as recent cash flow, account balances, and other financial indicators that provide insights into an applicant’s financial health.

Q: How does alternative credit data benefit lenders?
A: Alternative credit data offers several benefits to lenders. It provides up-to-date information, reduces costs, offers greater insight into a borrower’s financial health, and allows for ongoing monitoring of a borrower’s financial situation.

Q: Can alternative credit data help individuals with thin credit profiles access loans?
A: Yes, alternative credit data plays a crucial role in helping individuals with limited or no credit history access loans at favorable rates. It allows lenders to assess creditworthiness based on alternative indicators, enabling these individuals to build their credit history and improve their financial prospects.

Q: Does using alternative credit data replace traditional credit scores?
A: Alternative credit data can either replace or complement traditional credit scores. While credit scores continue to serve as a benchmark in credit decision-making, alternative data provides a more holistic view of a borrower’s financial situation, enhancing the lending process.

Conclusion

Alternative credit data is transforming the lending industry, providing lenders with valuable insights into a borrower’s financial health. By utilizing alternative data sources, lenders can make more informed loan decisions, improve access to credit, and foster better financial outcomes for borrowers. The future of lending lies in the integration of alternative credit data, offering a more comprehensive and accurate assessment of creditworthiness.