Alternative data — information not found in traditional credit reports — could give more American consumers access to credit. Using this data could score up to 90% of previously unrated consumers. This can be extremely helpful for the invisible credit population in the country today.
The population of credit invisible people is larger than you might think. 92 million adult Americans have little or no credit history. 67 million of these people have a “thin” credit file, meaning they have four accounts or less in their name. 25 million are considered totally invisible to credit. Invisible credit means that someone never has a credit history to be able to calculate a score.
Who are the Invisible Credits?
People can have invisible credit for many reasons. The most common reasons are that people are young or new to using credit, recently widowed or divorced, or using cash or debit cards. People who are invisible to credit or have thin credit records are more likely to have lower incomes, with 49% earning less than $25,000 a year. People with no credit are more likely to have to pay higher mortgage rates and often have higher premiums for car, home and rental insurance.
If alternative data were to be mined, there would be great benefits for the large population of low credit or invisible people in the country. In fact, 21% of low credit or invisible consumers could become assessable. 18% could be eligible for prime or quasi-prime offers, and 4% could be eligible for subprime offers. So what type of data can be used as an alternative to traditional credit information?
What would alternative data include?
Banking transactions could be one of the most useful forms of alternative data for people invisible in credit. Credit-blind people are more likely to use cash or debit cards, so they have a lot of data about their banking transactions. The use of bank transaction data could increase the number of primary consumers by nearly 4 million! Accounting for bank transaction data on all consumers could reduce the population of unassessable credit by 50%.
Utility bills are another useful form of alternative data. 90% of American adults have at least one utility bill in their name, and using this data could be very beneficial to the credit invisible population. Using payment information for utility bills could enable nine million consumers to become assessable. All of this information would be collected with the consumers’ consent so that if there were any negative marks in their payment history, it would not affect their credit score calculation.
Using employment and income verification might be the most useful alternative form of data to calculate a credit score. Checking information on income, employment, and debt-to-income ratio helps to accurately assess consumers. Ability to pay similar to traditional credit information. If people are working and earning a stable income, they should be able to access the same financial services they could access if they had more stable credit.
The use of alternative data opens many opportunities for the population of credit invisibles in the country. The use of banking transactions, utility payments and income verification shows that consumers are able to pay and are financially responsible, even if they have a limited credit history. Learn more about using alternative data in the infographic below: