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There have been more changes with credit reports in just the past year than in the past 15 years. As consumers seek new credit products or look for new ways to improve their credit, the credit industry is introducing new products and strategies to help them maximize their credit potential.
Because the lending landscape has become increasingly competitive, consumers have more choices than ever for credit products. Both traditional (banks) and non-traditional (online) lenders are seeking new solutions and looking for new insights to help refine their lending models.
Traditional credit data and scores have long been a mainstay in the financial services space, but addressing the different ways consumers are accessing credit these days can help explain where the industry is headed. Tapping into alternative credit data could open up credit access to a new generation of borrowers. The current state of alternative credit data is changing: Whether it's from the online lending boom or the rise of fintech lenders (lenders that provide credit via non-conventional channels), there are now more ways for lenders to gauge a consumer's financial stability, ability and willingness to repay their debt.
Alternative Data for Consumer Lending
There's a distinct difference between traditional credit data and alternative credit data. Traditional credit data includes loan and inquiry data on credit cards, auto loans, student loans and mortgage loans, typically with a term of 12 months or greater. Alternative data can include payment history for things such as rent, utilities and cell phones, and can be used in many different ways. Both types of data fall under the Fair Credit Reporting Act (FCRA), and their usage needs to be compliant so that it is displayable, disputable and correctable by the consumer.
Consumers Feel Empowered Contributing Information to Their Credit Files
More than half of consumers surveyed, 58%, say that having the ability to contribute payment history to their credit files makes them feel more empowered, according to the study. Consumers surveyed say they see the benefits of sharing additional financial information and contributing positive payment history to their credit reports. Convenience and the ability to access more favorable credit terms were seen as the primary benefits of sharing additional financial information.
Additionally, 54% of consumers agree that allowing lenders to digitally access financial data is more convenient than providing hard copies of documents to lenders, according to the study. However, security is a concern when it comes to sharing financial information digitally, as just 28% of consumers surveyed agreed that allowing digital access to financial data is more secure than providing hard copies.
65% of Lenders Use Alternative Data
Many lenders are already combining credit profiles with additional information to help them with their decision-making. According to the survey results, 65% of lenders say they are using information beyond the traditional credit report to make a lending decision.
When lenders were asked what additional sources of information they are using to make a lending decision, the top three alternative data sources were:
- Verification of income: 73%
- Verification of employment: 70%
- Property judgments: 68%
Looking to the future, lenders plan to expand their sources for insight. The top three alternative data sources that lenders say they plan to use in the future are:
- Trended data (historical payment information): 25%
- Rental payment history: 24%
- Telephone and utility payment history: 19%
Consumer-Contributed Alternative Data Enters the Market
More people are becoming comfortable with sharing their data, provided they see clear benefits for doing so. Those benefits may include positive payment history, low credit utilization rate or other factors that can boost their financial profile. Of the consumers surveyed, 61% believe that adding payment history to their credit files would have a positive impact on their credit score. At the same time, 42% of consumers believe they are better borrowers than their credit scores represent. On the lender side, 75% of those surveyed say they believe consumers will agree to offer permission to their data as long as they're given control over it.
As lenders increase their use of alternative data, one source that can benefit consumers is Experian Boost™† , which allows users to add utility and phone bill payment history to their Experian credit report, providing an opportunity to improve their FICO® Score* instantly. Since launching, 62% of Experian Boost users have improved their FICO® Scores.
Another example is the new UltraFICO™ Score, which allows users to contribute checking and savings account information to supplement credit report information and create an enhanced FICO® Score. Both Experian Boost and UltraFICO™ Score give consumers more control in showing their good credit standing.
By having a deeper understanding of what alternative data is, consumers will continue to see how it may have a positive impact on their credit and financing possibilities, while also helping lenders be better equipped to push their lending practices to evolve.
Experian conducted two national online surveys with both credit providers and consumers regarding attitudes, awareness and use of alternative data.
For the lender survey, 239 partial and completed responses were collected across industries including banks, credit unions, auto finance, mortgage, bank card issuers and utility providers. The lender survey was fielded March 25 — April 12, 2019. Fifty-six percent of participants were banks and credit unions. Thirty percent work for organizations that reported asset sizes exceeding $1 billion.
For the consumer survey, Experian conducted a nationwide online survey of 540 respondents balanced to the U.S. Census. An additional oversample of 146 consumers was also gathered to provide insights at the generational level. The consumer survey was fielded April 26 — May 3, 2019.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. MSA is the acronym for metropolitan statistical area, which groups counties and cities into specific geographic areas for population censuses and compilations of related statistical data.
FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.