3 Habits of Responsible Borrowers
Lenders use traditional credit reports to assess the credit worthiness of borrowers. But a credit score alone cannot guarantee that applicants are indeed responsible borrowers - this is especially true for people who haven't yet built a credit history. You need to know their spending and saving habits to best understand their ability to repay your loans.
Here are three habits of responsible borrowers:
1. They pay their bills in full and on time
Responsible borrowers ensure that they pay their bills on or before the specified due date. They also pay rent and utility bills in full. Their accounts are current and in good standing, and they've established a timely payment history.
But how do you learn about the bill payment habits of these borrowers? Alternative credit reports can help you with that. These reports provide data on alternative credit — payment information for regular expenses such as rent, utility bills, phone bills, internet bills and subscriptions.
Borrowers with alternative credit are usually those with little to no credit history. According to the Consumer Financial Protection Bureau, around 26 million Americans have no credit history, while another 19 million have insufficient credit history. These borrowers may be recent immigrants whose credit history doesn't carry over, millennials who are just starting out or people who fell on hard times.
"Twenty-six million Americans have no credit history."
These borrowers may lack credit history but they can still be responsible payers. If they pay their bills in full and on time, they'll likely do the same with repayments for your loan.
2. They spend and save wisely
Responsible borrowers have a budget and make sure to stick with it. They live within their means and control impulse spending.
They plan for their future by having savings and emergency funds. They make regular contributions to these funds so they have what they need when they need it.
Because these borrowers have good spending and saving habits, they'll likely be setting aside funds and saving for their loan repayments.
3. They're organized
Responsible borrowers try their best to stay on top of their finances as well as other non-financial obligations. They are organized and reliable. When you schedule appointments with them, they arrive on time. These are borrowers who go for regular medical checkups or dental visits, bring their cars in for scheduled maintenance and keep records of their bill payments.
Because these borrowers are organized, they will arrive to their loan appointment with all pertinent documentation and forms. You can feel confident that they'll meet their loan repayments. They'll mark payment dates on their calendars, check them off their to-do lists and keep a record of having fulfilled their repayments.