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WHICH ALTERNATIVE CREDIT SCORE COMPANIES ARE BEST? A QUICK GUIDE FOR LENDERS

The defi Team defi INSIGHT, Originations

Representation of contract signing at the end of the loan origination process

Alternative credit score companies enable lenders to assess every applicant from a different perspective. Lenders no longer have to rely solely on traditional credit scores from the three major bureaus. Advances in software platforms that support loan origination processes have made it possible for more companies to accurately assess creditworthiness.

What Are the Best Alternative Credit Score Companies?

The best loan origination system (LOS) for a lender will calculate alternative credit scores for each loan type offered. To start collecting alternative credit data on their applicants, lenders should seek out an experienced LOS vendor who understands the importance of utilizing companies that offer reliable alternative credit data. The table below gives a list of the top 10 alternative credit scoring companies and a brief description of each:

Top 10 Alternative Credit Score Companies

Company

Description

FICO XD

Uses alternative data like telecom and utility payments to provide credit scores for those with thin files.

VantageScore

Developed by the three major credit bureaus, this score considers rent, utility, and telecom payments.

Experian Clarity Services

Provides alternative credit data that includes non-traditional financial information like payday loans, rent-to-own, and other specialty finance data.

TransUnion CreditVision

Enhances traditional credit reports with trended and alternative data, including insights from consumer payment behavior.

LexisNexis Risk Solutions

Provides alternative credit scoring based on public records, utility bills, and consumer-permissioned data.

Equifax Ignite

Offers analytics and alternative data insights to help lenders make informed credit decisions.

Finicity

Provides open banking solutions and uses financial data to assist in credit decision-making.

Lenddo

Uses social media, mobile phones, and other non-traditional data to assess creditworthiness.

Zest AI

Develops AI-powered credit scoring models using alternative data sources.

Nova Credit

Translates international credit histories into a U.S.-equivalent credit score for immigrants.

The Power of Alternative Credit Scores

Alternative credit scores are calculated based on data that isn’t typically tracked by one of the three major credit bureaus, such as income and monthly payments for utilities, rent, or subscription services. It also takes into account non-financial details like driving records and employment history. Alternative credit scores are essential in today’s lending market for three reasons.

1) Loans Based on Alternative Credit Scores Are Less Risky

Lenders should always supplement traditional scores with alternative credit data because it reduces risk. Loan applicants who can prove they make monthly payments on time are less likely to be delinquent than applicants with good credit scores but struggle to pay their rent.

Alternative credit data like driving history is also an important factor for structuring auto loans. If a borrower wrecks a car before the loan period ends, it may affect the collateral agreement or cause the borrower to fall behind on payments. An applicant who drives safely is less likely to get into an accident compared to one with a history of speeding tickets or other moving violations. This information can’t be found through a traditional hard credit inquiry.

2) Alternative Credit Data Can Be Used to Improve Loan Decisions

Alternative credit scoring is the only way lenders can fairly evaluate subprime and near-prime applicants. Traditional credit scores are sufficient for assessing applicants with very high scores (super prime) or abysmal scores (deep subprime). For these types of applicants, alternative credit data usually provides more detail than necessary. But for applicants who fall somewhere in the middle, which is the vast majority of applicants, traditional scores aren’t enough.

For example, an applicant with a relatively low traditional credit score falls under the subprime category. On paper, lenders might avoid offering loans to such applicants due to the higher risk associated with subprime lending. However, if a lender looks at an applicant’s alternative credit data and sees that multiple recurring bills are always paid on time, the risk level changes. Lenders can better understand applicants who may have minor issues on their credit report but who otherwise pay bills on time. With this new understanding of the applicant’s risk profile,  lenders can structure loans with better terms for this type of borrower and, over time, have greater potential to win more deals.

3) Lenders Can Provide Loans to Those With Limited Credit Histories

Alternative credit scoring is also a great way to assess people who don’t carry credit cards. For example, college students may need to take out personal or auto loans, but without an extensive credit history, their credit scores through traditional credit bureaus won’t accurately reflect their creditworthiness. Alternative credit data gives every applicant a chance of a fair assessment, along with a more suitable loan structure.

Alternative credit scores offer lenders many benefits, like further expanding their portfolios with little risk. Yet calculating them is often complicated and time-consuming. As a result, lenders have two options when seeking to utilize alternative credit scores. First, they can use the alternative credit score systems that some major credit bureaus offer. Or create their own scoring system with help from an experienced LOS vendor like defi SOLUTIONS.

How to Leverage Alternative Credit Scoring

Some modern loan origination systems come pre-integrated with alternative data sources that are automatically taken into account for each applicant. These systems are also designed to keep even the most sensitive information safe, so they don’t pose a risk to a lender’s future customers.

The best modern LOS will identify patterns in data, allowing lenders to discover new trends and connections. For example, an analysis of historical loans may show that consistent employment among applicants correlates with fewer delinquent payments. In response, lenders can configure their LOS to weigh this bit of alternative credit data more heavily during the decision process.

With alternative credit data fully integrated into a streamlined and modern LOS system, lenders can gain a new perspective on all of their applicants, resulting in dramatically improved portfolio performance.

Getting Started

defi SOLUTIONS is redefining loan origination with software solutions and services that enable lenders to automate, streamline, and deliver on their complete end-to-end lending lifecycle. Borrowers want a quick turnaround on their loan applications, and lenders want quick decisions that satisfy borrowers and hold up under scrutiny. With defi’s originations solutions, lenders can increase revenue and productivity through automation, configuration, and integrations and incorporate alternative credit score data and services that meet their unique needs. For more information on alternative credit score companies, contact our team today and learn how our cloud-based loan origination products can transform your business.

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