ALTERNATIVE CREDIT DATA: MANAGING PORTFOLIO RISK

 

Lenders have long relied heavily on scores from the big three credit bureaus. However, the bureaus have recognized that alternative credit data improves lending decision quality and reveals new lending opportunities. Rental payments, payday loans, employment history, utility bills, and even education records create a detailed picture of an individual’s financial position. So the largest bureaus have developed their own alternative credit data resources.

 

If you’ve had reservations about incorporating alternative credit data into your loan origination process, there’s growing evidence of the benefits. That includes better lending decisions, lower cost of credit for borrowers, and lower overall risk for your portfolio. 

Alternative Credit Data Provides Consumer Insight

As ever-larger portions of the US population transact online, they create billions of digital records that provide detailed insight into consumer behavior, spending habits, and financial strength. As additional sources of data become available, they paint a clearer picture of a consumer’s financial behavior. 

Major Bureaus Expand Their Services with Alternative Credit Data

The major credit bureaus are acquiring companies that aggregate and manage alternative credit data or have developed proprietary algorithms to more accurately evaluate a borrower’s creditworthiness.

Alternative credit data providers are making it easy to access their resources via configurable integration with modern cloud-based loan origination solutions. Lenders can use configuration menus to select the alternative credit data service they want to access and specify the items they want to include in the evaluation. There’s no need for expensive, time-consuming customized integration programming. Lending professionals can incorporate alternative credit data into the loan origination process in minutes.

Want to find out more about our software and services? Contact our team today. 

Alternative Credit Data Brings New Opportunities

Lenders who may not yet be convinced of the value of alternative credit data in managing portfolio risk should consider two important factors that are changing the lending landscape.

 

• An estimated 70 million adults in the United States have neither traditional credit scores nor solid credit histories with one of the three major bureaus. 
• Millennials, who now outnumber baby boomers, tend to be more credit-invisible, and represent a growing percentage of potential borrowers.

Without the ability to score these demographic segments using alternative credit data, lenders are ignoring vital population segments that have the potential to grow portfolio and profitability. 

 

In a study – The Predictive Value of Alternative Credit Scores – by the Financial Health Network (formerly known as the Center for Financial Services Innovation), several vendors of FCRA-compliant alternative data conducted real-world tests to evaluate the effect of alternative scoring on portfolio performance. The findings were overwhelmingly positive, with vendors reporting that they were able to:

• Realize a 20 to 40 percent increase in the ability to segment and score applicants with no credit history; 
• Approve and book at least 30 percent more credit applicants who had thin or no traditional credit files;
• Lower default rates by as much as 25 percent while increasing their approvals by almost 10 percent; and
• Increase approval rates for applicants with no traditional credit files by 35 percent and approval rates for applicants with thin files by 43 percent, while maintaining its current default rate.

For lenders, the increase in approval rates ranged from 4,000 to 50,000 thousand new borrowers per quarter. 

Alternative Credit Data for All Economic Cycles

With greater economic power in the wallets of consumers, lenders might be inclined to relax credit policies, capture more loans, and grow their portfolios. If you do, consider the advantages of alternative credit data for helping manage portfolio risk:

 

• Make lending decisions with a greater degree of confidence; 
• Extend credit to borrowers who may have otherwise been ignored; and
• Adjust loan terms to more accurately match borrower risk.

Regardless of the economic cycle, the wealth of consumer data now available to lenders virtually guarantees better quality lending decisions that reduce portfolio risk and expand the universe of lending opportunities. Alternative credit data has become an essential resource for managing portfolio risk.