Revolutionizing Credit Assessment: The Power of Alternative Data to Transform Financial Inclusion in America

Credit scores are an essential measure of financial health in the US. They have a huge impact on various major life decisions, such as housing, car leasing, and even job prospects. Companies and banks see credit scores as a numerical depiction of someone’s reliability to pay back a loan. If a consumer’s score is low enough, they will assume they are not trustworthy enough and charge them a higher interest rate, or in some cases, refuse to offer the loan. 

Looking at the Risks of Low Credit Score

Despite the importance of a credit score, a whopping 76 million Americans need a substantial credit history to supply lenders with. This is almost a third of the entire population, which shows how many people need equal financial opportunity. Of them, 16 million are “credit invisible,” meaning they have no credit history, and 61 million have “thin files,” meaning they have less than four credit accounts. Young people, immigrants, recent divorcees and widowers, and people who opt to use cash or debit are disproportionately affected by having a lack of credit history.

A subprime credit score carries significant risks, including higher loan costs and fewer lending options. For example, a lower credit score may mean spending an additional $33,000 in interest throughout a 30-year mortgage or hundreds more in interest on vehicle or emergency loans. Most Americans would find it challenging to pay emergency bills with just their savings, emphasizing the urgent need for more widespread access to credit.

The Use of Alternative Data

Companies are using alternative data in credit evaluations to overcome this problem. This includes data such as utility and telecom payment histories, which might provide details about a person’s financial responsibility outside of traditional credit reporting. Using this kind of data has been able to help score up to 32% of previously unscorable consumers and shift 8.4 million of these consumers into better credit bands. This method creates a more inclusive financial system by increasing credit availability for millions of people who would otherwise struggle to obtain any loan. 

In Conclusion

The adoption of alternative data in credit scoring would substantially change the assessment of financial reliability. Not having a long history of using credit would no longer be a barricade for so many people around the country. Ultimately, alternative data could create the foundation of a more equitable and inclusive financial ecosystem for all Americans.