What is Alternative Credit Scoring?

Traditional credit scores are based on a borrower’s history of repaying debt. This information is typically found in a credit report, which is compiled by a credit bureau. However, not everyone has a credit report, or their credit report may not be accurate. This is where alternative credit scoring comes in.

Alternative credit scoring uses data that is not traditionally used to calculate credit scores, such as rent payments, utility bills, and even social media activity. This data can be used to create a more comprehensive picture of a borrower’s financial history and behavior.

Importance of Alternative Credit Scoring

There are several reasons why alternative credit scoring is important. First, it allows lenders to assess the creditworthiness of borrowers who have no or limited traditional credit history. This is important because there are many people who are creditworthy but who do not have a credit history because they have never borrowed money before, or because they have made mistakes in the past that have resulted in negative marks on their credit report.

Second, alternative credit scoring can be used to predict the risk of default more accurately than traditional credit scoring. This is because alternative credit scoring data can provide a more comprehensive picture of a borrower’s financial behavior. For example, a borrower who has a history of paying their rent on time is more likely to be a good credit risk than a borrower who has a history of late payments.

Third, alternative credit scoring can help lenders to make more informed lending decisions. This can lead to better outcomes for both borrowers and lenders. For example, a lender who uses alternative credit scoring may be more willing to lend to a borrower who has no traditional credit history but who has a history of paying their rent on time. This can help borrowers to build their credit history and access the financial products they need.

Benefits of Alternative Credit Scoring

There are several benefits to using alternative credit scoring.

• It can help lenders to reach a wider pool of borrowers. This is important because there is a growing population of people who are credit invisible, meaning that they do not have a traditional credit history. Alternative credit scoring can help these borrowers to access the financial products they need, such as loans, credit cards, and mortgages.
• Alternative credit scoring can help lenders to make more accurate lending decisions. This can lead to lower default rates and higher profits for lenders. For example, a lender who uses alternative credit scoring may be able to identify borrowers who are more viable to repay their loans on time, and therefore offer them lower interest rates.
• Alternative credit scoring can help lenders to comply with regulations. Many regulators are now requiring lenders to consider alternative credit data when making lending decisions. This is because alternative credit scoring can help lenders to assess the creditworthiness of borrowers who have no or limited traditional credit history.

Conclusion

Alternative credit scoring is a valuable tool for lenders. It can help lenders to assess the creditworthiness of borrowers who have no or limited traditional credit history, make more accurate lending decisions, and comply with regulations. As the use of alternative credit scoring continues to grow, it is likely to have a substantial impact on the lending industry.

In addition to the benefits mentioned above, alternative credit scoring can also help to improve financial inclusion. Financial inclusion is the state in which people have access to affordable financial services, such as loans, credit cards, and savings accounts. Alternative credit scoring can help to expand access to financial services to people who have been traditionally excluded from the financial system, such as people with low incomes, people with limited credit histories, and people who live in rural areas.

Overall, alternative credit scoring is a powerful tool that can help lenders to make better lending decisions and improve financial inclusion. As the use of alternative credit scoring continues to grow, it is likely to have a positive impact on the financial system.