Lenders and Consumers Agree on the Benefits of Alternative Data

Credit reporting has changed substantially over the years. Compared to the past when lenders rarely used anything other than traditional credit reports, the majority of lenders today use alternative data when making a lending decision. In addition, most consumers believe that alternative data can benefit and empower them, according to a new report by Experian.

Most U.S. adults have a credit history, allowing consumers to obtain credit and lenders to determine the cost of credit. Still, many adults lack current or updated credit files, making it extremely difficult for them to obtain credit. According to Experian, “two-thirds of lenders decline more than 5 percent of applicants due to insufficient credit history.” Although 5 percent may seem small, this represents millions of Americans.

Even if a consumer has a credit history, it may not accurately reflect creditworthiness. About 42 percent of consumers believe their credit score fails to reflect their creditworthiness, and 61 percent believe that providing alternative data could positively impact their credit scores. According to Experian, consumers are most willing to share their utility bill payment history, paycheck stubs, and bank account transactions in order to obtain credit.

In addition, just over 50 percent of consumers believe that “allowing lenders to digitally access financial data is more convenient than providing hard copies of documents to lenders,” yet there is still a concern with data security. Three-fourths of consumers believe that hard copies are more secure than digital files.

Most lenders are using data outside of the traditional credit report when making a lending decision. Currently, lenders tend to use data sources to verify income and employment. About a fifth of lenders plan to use trended data, rental payment history, and telephone and utility payment history in the future.

In the end, the majority of lenders and consumers believe alternative data can be beneficial for both parties, and the use of alternative data is likely to become more popular over time. Hopefully, alternative data will create a credit history for those who have been historically credit invisible.