Shifting household incomes pressure banks to improve credit analysis

The changing dynamics of the national economic climate has put the onus on financial institutions to widen the variety of data sources used to evaluate the creditworthiness of new credit applicants. This blog has discussed this new reality in a number of posts, with a repeat theme being banks’ desire to improve credit application processes through the analysis of nontraditional credit information.

Many bank professionals have put a sharper lens on applicants’ payment track record for a variety of typically overlooked financial products, including rent and used car loans. This higher level of analysis is meant to provide banks with a more complete look at an applicant’s credit history, helping to determine the likelihood that a certain individual would stay current on new debt.

As more financial institutions seek to tap into these alternative data sources, it will be critical to support their application processing capabilities with risk management software that includes advanced credit risk analysis tools. This is especially important given recent reports on the country’s shifting household income situation.

Census Bureau data in September showed fewer states experienced a decline in household incomes in 2011 compared to the year before. That could be positive news for lenders hoping to increase client portfolios, though banks in certain states – such as Nevada, Louisiana and Florida – may find their pool of qualified borrowers smaller than it once was.

Residents in those states experienced some of the highest median income declines by percentage nationwide, according to the Census Bureau. Median income dropped by a nation-high 6 percent in Nevada.

Such changes may encourage banks to become more reliant on alternative data sources when assessing credit applicants in the future, particularly given the difficulty some have experienced expanding their customer portfolios.

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