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Alternative data can include payment history for things such as rent, utilities and cell phones that are used for credit reporting purposes. Lenders can look at this alternative data when approving a loan to assess your credit stability, ability to pay and even your willingness to pay on time, and how often you pay late. Lenders will check your credit score and your credit history too.
What Are Alternative Financial Services?
More than 100 million Americans have sought alternative financial services such as short-term loans, pawn shop loans, payday loans, rent-to-own, and subprime credit cards, according to Experian. These millions of Americans lack the credit history to secure a loan in the traditional credit market, and because of that, lenders must look at each consumer and consider what led them to their current credit status.
Is the person:
- Young and without a sufficient credit history to properly qualify for a traditional loan?
- An otherwise creditworthy person who faced financial hardship such as losing their job or dealing with an unexpected medical issue?
- A recent immigrant with little or no credit history in the U.S.?
- Someone who has been irresponsible with credit?
Alternative financial services are crucial to many Americans to help them manage monthly expenses through tough times and when income is unsteady.
Why Use Alternative Data?
The use of alternative data can potentially help get more reliable people approved for credit in order to buy a home, purchase a car or take out a personal loan. In Experian's State of Alternative Credit Data report, 53% of consumers said they believe some of these alternative sources, such as utility bill payment history, savings and checking account transactions, and mobile phone payments, would have a positive effect on their credit score.
53% of consumers
said they believe alternative sources would have a positive effect on their credit score.
Alternative Data Can Help Assess Risk
Lenders are already looking at alternative data to assess if a borrower is risky or not. About 80% of lenders claim they rely on a credit report plus additional information, such as alternative data, when making a credit decision, according to the Experian State of Alternative Credit Data report. Understanding whether someone is risky or not can be tough if there isn't enough credit history to generate a credit score. Lenders will use alternative credit data to further evaluate a consumer so they can have a more rounded view of their credit and payment history.
80% of lenders
rely on a credit report plus additional information when making a credit decision.
"While we are best known for the traditional credit scores we provide, we recognize that a score is a mere snapshot in time," says Alex Lintner, president of consumer information services at Experian. "We believe everyone deserves access to quality credit. When you give lenders the opportunity to layer on additional sources of data—like trended data, attributes, rent and utility payment history, and short-term loans—suddenly a much more comprehensive picture of the consumer emerges."
FinTech and You
More financial tech companies, known as FinTechs, and online lenders have emerged on the credit scene as consumers have adapted how they manage their money and credit. These new FinTech providers are working with several types of credit from different channels to help make lending easier for consumers.
The credit score, while still important, doesn't necessarily capture the variety of credit information created, so it can be hard for lenders to have visibility to really know how creditworthy someone is. For example, the same alternative data report found that, relative to their numbers, millennials open more loans per person than any other age group. That age group represented 25% of the subprime loan market, but they open 34% of all the loans.
How Your Water Bill Can Impact Your Credit
Your water bill payment can be considered alternative data and can have an impact on getting approved for a loan. Lenders look at alternative data as a way to assess risk, and paying your bills on time is one of the biggest factors in determining your credit score. Currently, not all utility or telecommunication companies report payment information to the national credit reporting agencies. Despite this, consumers should know that failure to pay a bill will be reported on the person's credit history whether or not there is additional positive information.
Experian Boost™† Can Help Your Credit Score
Experian has been working to find a way to incorporate a consumer's bill payment history—for the very same things discussed above, like utilities, a mobile phone or cable TV bill—into their credit report. This type of alternative data, while shared by virtually all consumers, has never before been factored into a credit score until now.
Experian Boost puts consumers in control of the experience, allowing them to share their banking data through a secure process—using the same information that is requested from financial planning platforms such as Mint. Working only with direct, active consumer consent, Boost scans a bank account for "boostable" payment data (such as utility and telecom payments). Consumers can opt in and seamlessly switch Boost on and off to stop sharing data at any time.
"We estimate about 100 million consumers are excluded from mainstream credit and are paying more to borrow. This gives people an opportunity to change that, and we believe many will benefit from a higher credit score, better access to financial products, often at a cheaper cost."
— Brian Cassin, CEO of Experian
Early analysis showed that two out of three credit scores improved with Boost. In fact, 75% of consumers with a score below 680 saw an improvement in their credit score, while 14% of consumers with a credit score at or below 579 moved to a score between 620 and 679.
"For the first time ever, consumers can build out their credit profiles and get credit for their utility and mobile phone payment history, thanks to Experian Boost," says Jeff Softley, chief revenue officer for Experian Consumer Services. "Experian Boost will allow consumers with otherwise good credit habits to get credit for their positive payment behavior as well, across mobile phone and utility. Now consumers will have more control in this process, and that's why we built Experian Boost."
Experian Boost will be available in early 2019, but you can visit experian.com/boost now to register for early access. By signing up for a free Experian membership, you will receive a free credit report and FICO® Score* immediately and will be one of the first to experience Experian Boost. Making better decisions is a priority for both consumers and lenders, and the basics still apply. You can check your credit report for free to make sure there are no kinks in your credit.
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 score 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.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on January 28, 2019, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.