Tag: nontraditional credit scores

Credit reports and conventional credit scores give lenders a strong starting point for evaluating applicants and managing risk. But today's competitive environment often requires deeper insights, such as credit attributes. Experian develops industry-leading credit attributes and models using traditional methods, as well as the latest techniques in machine learning, advanced analytics and alternative credit data — or expanded Fair Credit Reporting Act (FCRA)-regulated data)1 to unlock valuable consumer spending and payment information so businesses can drive better outcomes, optimize risk management and better serve consumers READ MORE: Using Alternative Credit Data for Credit Underwriting Turning credit data into digestible credit attributes Lenders rely on credit attributes — specific characteristics or variables based on the underlying data — to better understand the potentially overwhelming flow of data from traditional and non-traditional sources. However, choosing, testing, monitoring, maintaining and updating attributes can be a time- and resource-intensive process. Experian has over 45 years of experience with data analytics, modeling and helping clients develop and manage credit attributes and risk management. Currently, we offer over 4,500 attributes to lenders, including core attributes and subsets for specific industries. These are continually monitored, and new attributes are released based on consumer trends and regulatory requirements. Lenders can use these credit attributes to develop precise and explainable scoring models and strategies. As a result, they can more consistently identify qualified prospects that might otherwise be missed, set initial limits, manage credit lines, improve loyalty by applying appropriate treatments and limit credit losses. Using expanded credit data effectively Leveraging credit attributes is critical for portfolio growth, and businesses can use their expanding access to credit data and insights to improve their credit decisioning. A few examples: Spot trends in consumer behavior: Going beyond a snapshot of a credit report, Trended 3DTM attributes reveal and make it easier to understand customers' behavioral patterns. Use these insights to determine when a customer will likely revolve, transact, transfer a balance or fall into distress. Dig deeper into credit data: Making sense of vast amounts of credit report data can be difficult, but Premier AttributesSM  aggregates and summarizes findings. Lenders use the 2,100-plus attributes to segment populations and define policy rules. From prospecting to collections, businesses can save time and make more informed decisions across the customer lifecycle. Get a clear and complete picture: Businesses may be able to more accurately assess and approve applicants, simply by incorporating attributes overlooked by traditional credit bureau reports into their decisioning process. Clear View AttributesTM uses data from the largest alternative financial services specialty bureau, Clarity Services, to show how customers have used non-traditional lenders, including auto title lenders, rent-to-own and small-dollar credit lenders. The additional credit attributes and analysis help lenders make more strategic approval and credit limit decisions, leading to increased customer loyalty, reduced risk and business growth. Additionally, many organizations find that using credit attributes and customized strategies can be important for measuring and reaching financial inclusion goals. Many consumers have a thin credit file (fewer than five credit accounts), don’t have a credit file or don’t have information for conventional scoring models to score them. Expanded credit data and attributes can help lenders accurately evaluate many of these consumers and remove barriers that keep them from accessing mainstream financial services. There's no time to wait Businesses can expand their customer base while reducing risk by looking beyond traditional credit bureau data and scores. Download our latest e-book on credit attributes to learn more about what Experian offers and how we can help you stay ahead of the competition.  Download e-book  Learn more 1When we refer to “Alternative Credit Data," this refers to the use of alternative data and its appropriate use in consumer credit lending decisions, as regulated by the Fair Credit Reporting Act. Hence, the term “Expanded FCRA Data" may also apply in this instance and both can be used interchangeably.

Retailers are already starting to display their Christmas decorations in stores and it’s only early November. Some might think they are putting the cart ahead of the horse, but as I see this happening, I’m reminded of the quote by the New York Yankee’s Yogi Berra who famously said, “It gets late early out there.” It may never be too early to get ready for the next big thing, especially when what’s coming might set the course for years to come. As 2019 comes to an end and we prepare for the excitement and challenges of a new decade, the same can be true for all of us working in the lending and credit space, especially when it comes to how we will approach the use of alternative data in the next decade. Over the last year, alternative data has been a hot topic of discussion. If you typed “alternative data and credit” into a Google search today, you would get more than 200 million results. That’s a lot of conversations, but while nearly everyone seems to be talking about alternative data, we may not have a clear view of how alternative data will be used in the credit economy. How we approach the use of alternative data in the coming decade is going to be one of the most important decisions the lending industry makes. Inaction is not an option, and the time for testing new approaches is starting to run out – as Yogi said, it’s getting late early. And here’s why: millennials. We already know that millennials tend to make up a significant percentage of consumers with so-called “thin-file” credit reports. They “grew up” during the Great Recession and that has had a profound impact on their financial behavior. Unlike their parents, they tend to have only one or two credit cards, they keep a majority of their savings in cash and, in general, they distrust financial institutions. However, they currently account for more than 21 percent of discretionary spend in the U.S. economy, and that percentage is going to expand exponentially in the coming decade. The recession fundamentally changed how lending happens, resulting in more regulation and a snowball effect of other economic challenges. As a result, millennials must work harder to catch up financially and are putting off major life milestones that past generations have historically done earlier in life, such as homeownership. They more often choose to rent and, while they pay their bills, rent and other factors such as utility and phone bill payments are traditionally not calculated in credit scores, ultimately leaving this generation thin-filed or worse, credit invisible. This is not a sustainable scenario as we enter the next decade. One of the biggest market dynamics we can expect to see over the next decade is consumer control. Consumers, especially millennials, want to be in the driver’s seat of their “credit journey” and play an active role in improving their financial situations. We are seeing a greater openness to providing data, which in turn enables lenders to make more informed decisions. This change is disrupting the status quo and bringing new, innovative solutions to the table. At Experian, we have been testing how advanced analytics and machine learning can help accelerate the use of alternative data in credit and lending decisions. And we continue to work to make the process of analyzing this data as simple as possible, making it available to all lenders in all verticals. To help credit invisible and thin-file consumers gain access to fair and affordable credit, we’ve recently announced Experian Lift, a new suite of credit score products that combines exclusive traditional credit, alternative credit and trended data assets to create a more holistic picture of consumer creditworthiness that will be available to lenders in early 2020. This new Experian credit score may improve access to credit for more than 40 million credit invisibles. There are more than 100 million consumers who are restricted by the traditional scoring methods used today. Experian Lift is another step in our commitment to helping improve financial health of consumers everywhere and empowers lenders to identify consumers who may otherwise be excluded from the traditional credit ecosystem. This isn’t just a trend in the United States. Brazil is using positive data to help drive financial inclusion, as are others around the world. As I said, it’s getting late early. Things are moving fast. Already we are seeing technology companies playing a bigger role in the push for alternative data – often powered by fintech startups. At the same time, there also has been a strong uptick in tech companies entering the banking space. Have you signed up for your Apple credit card yet? It will take all of 15 seconds to apply, and that’s expected to continue over the next decade. All of this is changing how the lending and credit industry must approach decision making, while also creating real-time frictionless experiences that empower the consumer. We saw this with the launch of Experian Boost earlier this year. The results speak for themselves: hundreds of thousands of previously thin-file consumers have seen their credit scores instantly increase. We have also empowered millions of consumers to get more control of their credit by using Experian Boost to contribute new, positive phone, cable and utility payment histories. Through Experian Boost, we’re empowering consumers to play an active role in building their credit histories. And, with Experian Lift, we’re empowering lenders to identify consumers who may otherwise be excluded from the traditional credit ecosystem. That’s game-changing. Disruptions like Experian Boost and newly announced Experian Lift are going to define the coming decade in credit and lending. Our industry needs to be ready because while it may seem early, it’s getting late.

Your consumers’ credit score plays an important role in how lenders and financial institutions measure their creditworthiness and risk. With a good credit score, which is generally defined as a score of 700 or above, they can quickly be approved for credit cards, qualify for a mortgage, and have easier access to loans with lower interest rates. In the spirit of Financial Literacy Month, we’ve rounded up what it takes for consumers to have a good credit score, in addition to some alternative considerations. Pay on Time Life gets busy and sometimes your consumers miss the “credit card payment due” note on their calendar squished between their work meetings and doctor’s appointment. However, payment history is one of the top factors in most credit scoring models and accounts for 35% of their credit score. As the primary objective of your consumers’ credit score is to illustrate to lenders just how likely they are to repay their debts, even one missed payment can be viewed negatively when reviewing their credit history. However, if there is a missed payment, consider checking their alternative financial services payments. They may have additional payment histories that will skew their creditworthiness more so than just their record according to traditional credit lines alone. Limit Credit Cards When your consumers apply for a new loan or credit card, lenders “pull” their credit report(s) to review their profile and weigh the risk of granting them credit or loan approval. The record of the access to their credit reports is known as a “hard” inquiry and has the potential to impact their credit score for up to 12 months. Plus, if they’re already having trouble using their card responsibly, taking on potential new revolving credit could impact their balance-to-limit ratio. For your customers that may be looking for new cards, Experian can estimate your consumers spend on all general-purpose credit and charge cards, so you can identify where there is additional wallet share and assign their credit lines based on actual spending need. Have a Lengthy Credit History The longer your consumers’ credit history, the more time they’ve spent successfully managing their credit obligations. When considering credit age, which makes up 21% of their credit score, credit scoring models evaluate the ages of your consumers’ oldest and newest accounts, along with the average age of all their accounts. Every time they open new credit cards or close an old account, the average age of their credit history is impacted. If your consumer’s score is being negatively affected by their credit history, consider adding information from alternative credit data sources for a more complete view. Manage Debt Wisely While some types of debt, such as a mortgage, can help build financial health, too much debt may lead to significant financial problems. By planning, budgeting, only borrowing when it makes sense, and setting themselves up for unexpected financial expenses, your consumers will be on the path to effective debt management. To get a better view of your consumers spending, consider Experian’s Trended3DTM, a trended attribute set that helps lenders unlock valuable insights hidden within their consumers’ credit scores. By using Trended3DTM data attributes, you’ll be able to see how much of your consumers’ credit line they typically utilize, whether they tend to revolve or transact, and if they are likely to transfer a balance. By adopting these habits and making smart financial decisions, your consumers will quickly realize that it’s never too late to rebuild their credit score. For example, they can potentially instantly improve their score with Experian Boost, an online tool that scans their bank account transactions to identify mobile phone and utility payments. The positive payments are then added to their Experian credit file and increase their FICO® Score in real time. Learn More About Experian Boost Learn More About Experian Trended 3DTM

Every morning, I wake up and walk bleary eyed to the bathroom, pop in my contacts and start my usual routine. Did I always have contacts? No. But putting on my contacts and seeing clearly has become part of my routine. After getting used to contacts, wearing glasses pales in comparison. This is how I view alternative credit data in lending. Are you having qualms about using this new data set? I get it, it’s like sticking a contact into your eye for the first time: painful and frustrating because you’re not sure what to do. To relieve you of the guesswork, we’ve compiled the top four myths related to this new data set to provide an in-depth view as to why this data is an essential supplement to your traditional credit file. Myth 1: Alternative credit data is not relevant. As consumers are shifting to new ways of gaining credit, it’s important for the industry to keep up. These data types are being captured by specialty credit bureaus. Gone are the days when alternative financing only included the payday store on the street corner. Alternative financing now expands to loans such as online installment, rent-to-own, point-of-sale financing, and auto-title loans. Consumers automatically default to the financing source familiar to them – which doesn’t necessarily mean traditional financial institutions. For example, some consumers may not walk into a bank branch anymore to get a loan, instead they may search online for the best rates, find a completely digital experience and get approved without ever leaving their couches. Alternative credit data gives you a lens into this activity. Myth 2: Borrowers with little to no traditional credit history are high risk. A common misconception of a thin-file borrower is that they may be high risk. According to the CFPB, roughly 45 million Americans have little to no credit history and this group may contain minority consumers or those from low income neighborhoods. However, they also may contain recent immigrants or young consumers who haven’t had exposure to traditional credit products. According to recent findings, one in five U.S. consumers has an alternative financial services data hit– some of these are even in the exceptional or very good credit segments. Myth 3: Alternative credit data is inaccurate and has poor data quality. On the contrary, this data set is collected, aggregated and verified in the same way as traditional credit data. Some sources of data, such as rental payments, are monthly and create a consistent look at a consumer’s financial behaviors. Experian’s Clarity Services, the leading source of alternative finance data, reports their consumer information, which includes application information and bank account data, as 99.9% accurate. Myth 4: Using alternative credit data might be harmful to the consumer. This data enables a more complete view of a consumer’s credit behavior for lenders, and provides consumers the opportunity to establish and maintain a credit profile. As with all information, consumers will be assessed appropriately based on what the data shows about their credit worthiness. Alternative credit data provides a better risk lens to the lender and consumers may get more access and approval for products that they want and deserve. In fact, a recent Experian survey found 71% of lenders believe alternative credit data will help consumers who would have previously been declined. Like putting in a new pair of contact lenses the first time, it may be uncomfortable to figure out the best use for alternative credit data in your daily rhythm. But once it’s added, it’s undeniable the difference it makes in your day-to-day decisions and suddenly you wonder how you’ve survived without it so long. See your consumers clearly today with alternative credit data. Learn More About Alternative Credit Data

Traditional credit data has long been the end-all-be-all ruling the financial services space. Like the staple black suit or that little black dress in your closet, it’s been the quintessential go-to for decades. Sure, the financial industry has some seasonality, but traditional credit data has reigned supreme as the reliable pillar. It’s dependable. And for a long time, it’s all there was to the equation. But as with finance, fashion and all things – evolution has occurred. Specifically, how consumers are managing their money has evolved, which calls for deeper insights that are still defensible and disputable. Alternative credit data is the new black. It's increasingly integrated in credit talks for lenders across the country. Much like that LBD, it's become a lending staple – that closet (or portfolio) must-have – to leverage for better decisioning when determining creditworthiness. What is alternative data? In our data-driven industry, “alternative” data as a whole may best be summed up as FCRA-compliant credit data that isn't typically included in traditional credit reports. For traditional data, think loan and inquiry data on bankcards, auto, mortgage and personal loans; typically trades with a term of 12 months or greater. Some examples of alternative credit data include alternative financial services data, rental data, full-file public records and account aggregation. These insights can ultimately improve credit access and decisioning for millions of consumers who may otherwise be overlooked. Alternative or not, every bit of information counts FCRA-compliant, user permissioned data allows lenders to easily verify assets and income electronically, thereby giving lenders more confidence in their decision and allowing consumers to gain access to lower-cost financing. From a risk management perspective, alternative credit data can also help identify riskier consumers by identifying information like the number of payday loans acquired within a year or number of first-payment defaults. Alternative credit data can give 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. From closet finds that refresh your look to that LBD, alternative credit data gives lenders more transparency into their consumers, and gives consumers seeking credit a greater foundation to help their case for creditworthiness. It really is this season’s – and every season’s – must-have. Learn more

Whether it is an online marketplace lender offering to refinance the student loan debt of a recent college graduate or an online small-business lender providing an entrepreneur with a loan when no one else will, there is no doubt innovation in the online lending sector is changing how Americans gain access to credit. This expanding market segment takes great pride in using “next-generation” underwriting and credit scoring risk models. In particular, many online lenders are incorporating noncredit information such as income, education history (i.e., type of degree and college), professional licenses and consumer-supplied information in an effort to strike the right balance between properly assessing credit risk and serving consumers typically shunned by traditional lenders because of a thin credit history. Regulatory concerns The exponential growth of the online lending sector has caught the attention of regulators — such as the U.S. Treasury Department, the Federal Deposit Insurance Corporation, Congress and the California Business Development Office — who are interested in learning more about how online marketplace lenders are assessing the credit risk of consumers and small businesses. At least one official, Antonio Weiss, a counselor to the Treasury secretary, has publicly raised concerns about the use of so-called nontraditional data in the underwriting process, particularly data gleaned from social media accounts. Weiss said that “just because a credit decision is made by an algorithm, doesn’t mean it is fair,” citing the need for lenders to be aware of compliance with fair lending obligations when integrating nontraditional credit data. Innovative and “tried and true” are not mutually exclusive Some have suggested the only way to assuage regulatory concerns and control risk is by using tried-and-true legacy credit risk models. The fact is, however, online marketplace lenders can — and should — continue to push the envelope on innovative underwriting and business models, so long as these models properly gauge credit risk and ensure compliance with fair lending rules. It’s not a simple either-or scenario. Lenders always must ensure their scoring analytics are based upon predictive and accurate data. That’s why lenders historically have relied on credit history, which is based upon data consumers can dispute using their rights under the Fair Credit Reporting Act. Statistically sound and validated scores protect consumers from discrimination and lenders from disparate impact claims under the Equal Credit Opportunity Act. The Office of the Comptroller of the Currency guidance on model risk management is an example of regulators’ focus on holding responsible the entities they oversee for the validation, testing and accuracy of their models. Marketplace lenders who want to push the limit can look to credit scoring models now being used in the marketplace without negatively impacting credit quality or raising fair lending risk. For example, VantageScore® allows for the scoring of 30 million to 35 million more people who currently are unscoreable under legacy credit score models. The VantageScore® credit score does this by using a broader, deeper set of credit file data and more advanced modeling techniques. This allows the VantageScore® credit score model to capture unique consumer behaviors more accurately. In conclusion, online marketplace lenders should continue innovating with their own “secret sauce” and custom decisioning systems that may include a mix of noncredit factors. But they also can stay ahead of the curve by relying on innovative “tried-and-true” credit score models like the VantageScore® credit score model. These models incorporate the best of both worlds by leaning on innovative scoring analytics that are more inclusive, while providing marketplace lenders with assurances the decisioning is both statistically sound and compliant with fair lending laws. VantageScore® is a registered trademark of VantageScore Solutions, LLC.