What Alternative Credit Scoring Models are all about

Helium Verify, Oct. 18, 2018

Did you know 52% of loans are not reported to the credit bureau’s?

This means accurate measurement of risk is fundamental to a lender’s bottom line.

Reporting agencies like Equifax and Transunion attempt to provide a holistic picture of a borrower’s creditworthiness but have serious drawbacks. One of the reasons of the market meltdown of 2008 is because investors relied on credit scoring models that misconstrued the risks.

Credit scoring models consider a handful of criteria such as credit card payment history, amount owed, length of accounts, credit mix, and new credit. The scoring model only paints a partial picture of a person’s financial health and behavior, and, therefore, their likelihood to make payments in a timely fashion throughout the course of a loan. Lenders can better assess risk, and set interest rates and other terms accordingly, by taking more data points into consideration. Years of transaction history, for example, can demonstrate whether or not a person consistently paid their rent and utility bills on time, providing an important glimpse into their financial behavior.

This may work satisfactory for prime borrowers. However, for individuals that have no credit history it simply does not work. It is estimated that 25% of the population falls into this data set.

The solution is alternative credit data which is a more robust and real-time credit risk model that was developed to better tap into this opportunity, that considers more than just credit history.

Some inputs of alternative credit models include, utility bill payment history, rental data, public records, bank account transactions. These insights can ultimately improve risk assessment and decisioning for millions of consumers who may otherwise be overlooked. It can also help identify riskier consumers, by accessing their bank transactions in real-time to gather crucial information like the number of payday loans acquired within a year, number of stop payments/NSF transactions and a peek at their payroll schedule and spending patterns. Alternative credit data provides supplemental insight into a consumer’s stability, ability and willingness to repay that is not available on a traditional credit report that can help lenders avoid risk or price accordingly.