How utility and rent payment data can identify risky borrowers
If a big part of your business involves extending lines of credit, personal loans or other lending products, you've probably come across customers who intuitively seem trustworthy, but you lack data to confirm your assumption. They either have thin-file credit reports or no credit scores at all, so you turn them away.
"55% of credit card users spend less than $500 a month with their credit cards."
Keep in mind that traditional credit scores, while useful, don't provide the whole story. A person's rent, utility and phone payment habits indicate whether he's a low- or high-risk customer. How can you use this information to identify risky borrowers?
Acquiring rent and utility data
Few traditional credit reports include customers' rent and utility payment data. The ones that do usually have snapshots that don't provide the whole story. For example, while one landlord may report his tenant's rent payment habits religiously, another may not. With regard to utilities, some only report activity to credit bureaus when people miss payments, so traditional scores that factor this information can be misleading.
To avoid inaccuracies, you're better off getting reports from companies specializing in alternative credit data. For example, the PRBC report links to consumers' financial institutions, monitoring when individuals pay their utility bills, rent, phone bills and other expenses. Essentially, the PRBC report delivers a comprehensive financial profile, so you'll know how a person manages his expenses. The report also produces a score, indicating people's overall creditworthiness.
Analyzing utility and rent payment data
You need to be aware that utility and rent payment data isn't the same as credit card information. For example, many people use credit cards to pay for items they could not comfortably pay for in full. Yet 55 percent of credit card users spend less than $500 a month with their credit cards, according to a survey from ValuePenguin.com.
In contrast, rent and utility bills represent different obligations. If someone doesn't pay his rent on time, it increases the risk of the landlord kicking the tenant out or refusing to resign a lease. The same principle applies to utility bills. Fail to pay the electric bill, and the utility company will turn the power off.
Keep these factors in mind when reviewing your customers' PRBC reports. Those who pay bills several days before the deadlines and pay their landlords early on a consistent basis are likely quite creditworthy.
How to reduce the chance of late payments
Given that lines of credit are different than rent and utility payments, take a couple of measures to reduce the chance of borrowers' making late payments:
- Document terms and conditions: Make sure borrowers understand the penalties associated with late payments and defaults. If they understand the repercussions of being negligent, they're more likely to keep up with payments.
- Call customers one day prior to due payments: If you haven't received payment within a 24-hour window of the due date, give the borrower a quick call as a reminder.
The best thing you can do to reduce the risk of late payments is to conduct research on your customers. In order to do that, you need all the information available. Utility and rent payment data can provide that context.