The term "Alternative Credit Data" has become an industry catchphrase in recent years and is generally meant to include any data that can be used to enhance consumer lending decisions and is not included in the credit databases of the national credit reporting agencies (NCRAs). The types of data classified as "alternative" are wide-ranging. Examples of alternative credit data include:
The importance of alternative credit data is significant and growing. Lenders often use this data when a consumer has a thin credit history or no credit history at the NCRAs. In these cases, it may provide enough information to enable the lender to make an informed lending decision (i.e., approve vs. decline, loan amount, product type, etc.) For deep subprime lenders (e.g., payday, short-term low dollar loans), alternative data is typically the primary source of consumer credit information from which to make lending decisions.
Additionally, the use of this kind of credit data is gaining more use by near prime and prime lenders. Even though the NCRAs remain the primary source of information for these types of loans, alternative data often helps complete the picture of the consumer’s credit worthiness, improving the decision-making process.
Alternative credit data is used by credit grantors to improve decision-making in many aspects of their business:
It is important to understand the specific use-cases for using this data and the applicable laws (federal and state) that govern how the data can be used. There are restrictions placed on the use of alternative credit data (marketing and credit) when the data qualifies as being covered by the Fair Credit Reporting Act (FCRA). It is extremely important to have appropriate compliance and legal review to ensure the data is being used within the guidelines of applicable law. Some of the primary federal laws relating to alternative credit data are as follows:
The argument is sometimes made that alternative credit data has negative consequences on individual consumers. While it is true that in certain situations the addition of alternative data can increase the projected credit risk of a consumer, the converse is true as well. Many consumers that have thin-files or no files at the NCRAs will benefit from a more extensive payment history offered by alternative sources. Overall, it helps complete the full credit picture benefiting consumers and credit grantors alike. Consumers benefit by having more credit options and credit grantors are better able to match credit products to the consumers they serve.
In total, alternative credit data can be a significant value-add to credit grantors and consumers. In fact, the majority of our nation’s most sophisticated consumer lending companies use one or more alternative data sources in their decision making processes. The key in capturing the value of alternative data is to conduct the analysis necessary to understand the cost/benefit tradeoff and to determine the optimal mix of data sources and their impact on profitability.