No, Alternative Credit Reports Don't Skew Consumer Credit Risk
You may have heard that alternative credit scores offset your customers' traditional credit scores, but that's not the case at all. Unless you decide to combine the scores through one of your own credit risk analysis models, the Experian, Equifax and TransUnion reports you pull on applicants will remain the same.
How Alternative Credit Reports Work
Alternative credit reports pull data from customers' rent, utility, internet and phone accounts to measure how diligently they keep up with monthly bills. They neither include credit card and loan payment data nor automatically adjust individuals' FICO scores. The assumption that they do is one of many myths associated with alternative credit.
Some alternative credit bureaus, such as PRBC, gather this data by connecting directly to consumers' open accounts, allowing them update reports in real time. For example, suppose a customer receives a bill from her electric company, and pays it immediately. The customer's alternative credit score will be automatically updated to reflect that transaction, possibly increasing the customer's score.
How do can you get your customers' alternative credit reports? It depends on which alternative credit bureau you choose to work with. For instance, PRBC sends reports to you via email or API. The latter option allows you to connect reports directly to your internal credit risk analysis system, if you have one.
What about scoring? Just like what you'd see in an Experian report, alternative credit reports include three-digit scores. However, alternative credit reports use a different scale: 100 - 850.
What Information Do Alternative Credit Reports Include?
In addition to rent, utility, internet, phone and insurance payment information, alternative credit reports also include public records, property histories and bank account data. This gives you a complete picture of who you're dealing with.
For example, suppose you pull an alternative credit report on a customer who wants to open a line of credit in your store. You look at the person's open accounts and see that he's paid his internet, phone and utility bills on time and in full for as long as those accounts have been open.
However, the report also discloses an eviction record that was filed four years ago. You take another look at the person's rent payment history and find that he's managed to keep up with payments for the past two years. With this information, you can ask the customer why he was evicted several years ago. Maybe he didn't have stable income back then, but does now - hence the reason why he can keep up with rent payments now.
Building Alternative Credit Into Your Credit Risk Analysis
How you choose to factor alternative credit reports into your customer credit checking process is up to you. Many business pull both traditional and alternative credit reports, and compare them side by side.
How you weigh the data within both reports depends on how deep you want to go. For all intents and purposes, reviewing a credit applicant's public records and account payment records should be enough to give you an idea as to whether the customer will be a good borrower.
If you do choose to get into some hardcore data analysis, you could use a tactic called segmented scoring. Segmented scoring involves identifying similar characteristics among all of your customers by analyzing credit scores.
For example, you can segment your customers by their locations, ages, income levels and other characteristics. Then, you can calculate the average alternative credit score for each of your segments. You can do this by adding up a group's credit scores and dividing it by the number of individuals within that group.
Segmented scoring isn't for everybody, but it's just a tactic to keep in mind. At the end of the day, analyze your customers' alternative and traditional credit information in whatever manner makes the most sense for you.