CFPB: Alternative credit data helps businesses reach credit invisibles

We've spoken about the challenges of engaging customers with no credit history before. You want to provide loans to them, but doing so could put your business at risk. How else could you assess their ability to pay back loans?

More businesses are turning toward alternative credit data to determine consumers' creditworthiness because, like you, they keep encountering the same situation: People walk through their doors looking for loans, but they don't have credit reports.

This challenge is so common that the Consumer Financial Protection Bureau actually initiated an effort to determine how alternative credit products can help credit-invisible individuals obtain loans

CFPB seeks ways to expand credit access 

On February 16, the CFPB announced it would be gathering feedback from the public to assess whether utility bills, phone bills, rent payments and other alternative data sources could help businesses make informed, secure decisions about people's ability to pay back loans. 

CFPB Director Richard Cordray asserted alternative credit data could hep consumers in Catch-22 situations: They need credit history to obtain loans, but require loans to build that history. 

"We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible and how to minimize any risks in how this information is used," said Cordray. 

You may recognize some of the types of people the CFPB hopes alternative credit data could assist: immigrants who are new to the country, Black or Hispanic individuals living in low-income neighborhoods and young professionals who just joined the workforce. Most of these consumers are just out of the credit economy, but alternative credit reports could provide the gateway they need to join.

Tracking monthly purchasing habits reveals a person's financial responsibility. Tracking monthly purchasing habits reveals a person's financial responsibility.

Should you use alternative credit reports? 

Studies have shown that alternative credit reports provide reliable information which businesses can use to assess the creditworthiness of people with no credit history. 

For example, a study from the Policy & Economic Research Council (PERC) assessed how alternative credit data such as utility bill and rent payment information enabled lenders to engage credit-invisible individuals. The research discovered that when lenders included alternative data in their risk models, they were better able to differentiate high-risk borrowers from low-risk borrowers. 

PERC also discovered correlations between delinquency rates and alternative credit data. For example, 47.7 percent of consumers who consistently failed to pay their utility and phone bills on time were behind on bankcard payments. In contrast, only 4.5 percent of those who kept up with utility and phone payments were credit invisible. 

So, from your perspective, as a business owner, it makes sense to use alternative credit data. The question is, where should you get it? 

Look for alternative credit agencies that develop reports which not only provide phone, utility and rent payment data, but also publicly available information that indicate individuals' living situations. For example, does a prospective borrower have any outstanding liens or switched addresses multiple times in the past two years? Details such as these can reveal just how stable a life someone is leading, and the implications such characteristics could have on the lending relationship. 

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