How Successful Is Alternative Data For The Lending Process?

Alternative Data For Credit Scoring & Finance

When banks have the right credit scoring software, it can help them make important decisions regarding who they choose to take on as borrowers. No organization wants to work with individuals who cannot make timely payments, but more reports are finding that many banks are starting to consider alternative forms of learning about customers’ purchasing histories.

The Washington Post said that many lenders are loosening their once tight credit standards, and that many are turning to borrowers who have less-than ideal credit histories. This is due in large part to the recovering economy, and more institutions are competitively searching for borrowers with stellar credit.

Michael Turner, president of the Political and Economic Research Council, explained that using alternative data in the underwriting process—such as utility payments and rental history—increases credit access for borrowers of all ages, lower income individuals and members of minority communities.

Chi Chi Wu, a staff attorney at the National Consumer Law Center, told the news source that she is not so sure that alternative data is a good thing.

“A lot of low-income consumers often pay their utilities late, especially in months when the costs are high. And sometimes people withhold their rent because of issues with their apartment,” she said. “Will these systems take any of that into account?”

GM Financial is one company that has incorporated alternative data into its repertoire, according to company chief credit and risk officer Steve Bowman. He told the Post that by being able to pull a wider set of consumer data, his organization can sometimes lower the interest rate charged on a loan by 2 percentage points.

Each financial institution is different, and alternative data might not always be the necessary answer. But, credit risk management software can help pinpoint borrowers who will be the best investments.

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