One problem that many consumers face in today's financial landscape is building enough credit history to qualify for better loans. 25% of American consumers fall under the criteria of "thin file" prospects. Essentially, they have fewer than 5 items in their traditional credit histories, making it more difficult for them to qualify and be approved for higher quality loans. With almost a fourth of the country absent from traditional credit files, many lenders are missing a large portion of their approval population and losing out on opportunities to underwrite emerging consumers.
What is a thin file?
A thin file is considered an alternative credit data source that includes consumer records who have little to no credit history. Those who typically do not have enough credit history to generate a traditional credit score generally fall within the thin file. 62 million U.S. consumers rely on alternative financial services, and 23% of these consumers may move from thin file to thick file status after adding this information to the overview of their credit history.
What qualifies as alternative credit data?
Alternative credit data is made up of information used to evaluate creditworthiness that is not typically included in a traditional credit report. With this thin file data, one can get obtain a deeper insight to boost visibility and transparency, and often allows consumers to gain more access to credit.
Examples of alternative credit data includes rental payments, cell phone payments, cable payments, bank account information (deposits, withdrawals, transfers, etc.), small dollar loans as well as attributes that may not be covered under the umbrella of financial conduct, such as occupation or education.
What is the advantage of implementing alternative credit data?
Utilizing alternative data can help expand responsible access to credit for people who lack a traditional credit score who may not have a loan repayment history on their credit report may have a strong history of paying other bills or recurring charges on a regular basis. This helps lenders with analyzing risk by offering to those who are more reliable, as well as suppressing those who have delinquent payment behaviors.
The primary advantages? Improved sources of creditworthiness to determine who without a traditional credit history are less likely to default; and providing more timely information, through providing more up-to-date, real-time information.
Who benefits from alternative credit data?
The lender, of course, as they gain access to deeper insights and a broader audience that many others are still not marketing to. But who are the individuals within the thin file and what do they typically look like?
The average alternative finance consumer is younger on average compared to the traditional file's population, with 35% being either a Millennial or part of Generation Z. They typically have a lower average credit score, with lower debt and fewer trades and spend less on credit cards while holding higher bad rates.
How is alternative credit data perceived?
Experian conducted two national online surveys with credit providers and consumers concerning attitudes, awareness ,and use of alternative data. The results showed that 70% of consumers are open to providing additional financial information to a lender if it increases their chance for approval or improves their interest rate. 80% of lenders rely on a credit report as well as other information. Less than 50% of the same lenders verify income, employment, assets, and public records before making a credit decision.
53% of consumers believe that the additional information would have a positive effect on their credit score, and many consumers would prefer alternative credit sources to be evaluated in their credit history, including utility bill payment history, savings/checking account transactions, and mobile phone payment history.
Alternative finance users tend to be more subprime, but almost 20% are prime or better. Implementing alternative data allows lenders to measure consumer stability in a more significant way than ever before. Consumer stability is one of the most predictive factors in determining intent to repay, and is linked directly to future loan performance. Research shows that, by adding in the visibility of alternative credit data to a near-prime population will show lenders an increase in the approval rate within a population is historically overlooked:
Consider the boost lenders will experience by adding in information to discover an under-served yet eligible and qualified audience. Adding alternative data gives lenders deeper insights, higher approvals, and new opportunities to bridge a large gap in current lending opportunities for a large portion of the population.