How alternative data can help lenders discover high-quality borrowers

Higher interest rates, increasing inflation and stagnant incomes have made borrowing more expensive and meeting financial commitments more difficult. In fact, recent data from Equifax shows that credit card utilization rates have increased year-over-year, alongside increases in delinquency rates. Additionally, the recent Equifax data shows that total consumer debt continues to rise, totaling $17.33 trillion as of January 2024, up 2.3% year over year. As card utilization rates and delinquencies increase, lenders can leverage alternative data and different scoring methods to help identify new opportunities as well as hidden risks.

For example, in the U.S., 45 million households rent their homes. If renters reliably pay utilities, they don’t always have the benefit of having that reflected in their credit scores. Incorporating alternative data such as on-time utility payments may help reveal a more holistic picture of a borrower’s finances and help open new markets for lenders. A lender might be unlikely to approve an applicant based on a credit score of 600 alone but on-time utilities payments may be good indicators of repayment likelihood and could potentially change that decision in the borrower’s favor.

Additionally, as consumers live with the higher cost of goods and services plus more normalized savings accounts, they may look for ways to maintain their current lifestyle. Available credit on cards as well as more nontraditional alternatives such as payday loans and short-term finance loans are ways to meet day-to-day necessities. Credit card usage shows up on a traditional credit report, payday and short-term financing loans may not.

 

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