Alternative Credit Score Methods
Using alternative credit score methods to evaluate borrowers is a growing trend. Risk analytics solutions empower lenders to gather data from various sources to assess borrowers and identify risk factors associated with a loan.
These alternative data sources have often empowered lenders to provide services to those who would otherwise fall by the wayside. New legislation could expand the use of alternative data scores by increasing the number of data sources that report to lenders.
The credit invisibility problem
A study from the Congressional Research Service found a lack of insights into population groups with limited credit scores. Citing data from the Consumer Financial Protection Bureau, the report explained that approximately 20 percent of the U.S. population could not be properly accounted for using traditional credit scorecard models.
In some cases, individuals are considered invisible to credit scorecards because they don’t have any credit history. In others, credit histories are so short, or it’s been so long since an individual has used credit, that a typical score can’t be calculated.
This credit scoring situation creates a circular problem. Individuals cannot obtain credit because they lack a credit history, but because they can’t receive the credit, they also can’t develop that history. The new legislation, The Credit Access and Inclusion Act aims to overcome this problem.
Looking at The Credit Access and Inclusion Act
In simplest terms, the new act allows for stronger reporting of non-traditional information to consumer credit reporting agencies. In particular, the prospective legislation focuses on historic data sources regarding payments such as rent, utilities, and telecommunications, American Banker Reported.
“The new act is designed to allow for stronger reporting of non-traditional information to consumer credit reporting agencies.”
The bill has passed the House unanimously and is popular across party lines. However, American Banker explained that there are some concerns. Practically speaking, many experts are excited about how this legislation could improve credit scoring by naturally incorporating more structured data sources.
However, some are worried that this transparency will lead to more people with bad credit exposure, continuing to leave many without access to credit.
After delving into various industry studies, American Banker found that, in most circumstances, the legislation should not be negative. While conventional wisdom would indicate that bad credit is worse than no credit, industry data suggests that more can be done to overcome bad credit than not having a credit rating.
Preparing for a new credit scoring model
Risk analytics technologies are already ushering in a transition to alternative data sources. At GDS Link, our risk analytics platform can empower banks and credit unions to leverage social media data and similar unstructured sources to adjust their credit scoring policies and reach a wider customer base.
The Credit Access and Inclusion Act is designed to create more equal opportunities surrounding access to credit and financial services. Risk analytics solutions are already opening the door to such capabilities, and the new act could further expand these capabilities.
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