How alternative data is improving credit access

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Building credit is not always easy when you’re first starting out, and that’s especially true if you’ve never had a credit card or loan.

Fortunately, almost anyone can get approved for a secured credit card, which lets you secure your line of credit with a cash deposit and have your credit movements reported to the three credit bureaus.

The ability to tap into alternative data sources and bank account usage, as well as rent payments, is also helping improve credit access on a large scale—and thankfully, there is more real-time financial data than ever, leading to better-informed credit decisions for both lenders and consumers.

How alternative data is expanding credit access

Why are companies in the credit space interested in helping more people gain access to credit? Sally Taylor, general manager and vice president of Scores at FICO, said lenders can benefit from other financial data streams to help gain a more in-depth view of a person’s ability to manage a loan. Next-generation financial data could also help streamline the loan application process for lenders and enable them to facilitate more precise transactions in less time, expanding portfolios and credit access.

Multiple solutions help to expand credit access with alternative data sources, including Experian Boost™, FICO® Score XD and the UltraFICO™ Score. The UltraFICO Score, in particular, was developed by FICO via a partnership with Experian and Finicity to help consumers improve access to credit by tapping into consumer-contributed data.

With the UltraFICO™ Score, consumers rely on their bank accounts and regular usage to help or further illustrate their creditworthiness. FICO says the new model can enhance your FICO® Score based on indicators of sound financial behavior using information like the length of time bank accounts have been open, the frequency of transactions and a history of positive account balances to help consumers build credit.

This information can be read electronically by Finicity and combined with consumer credit information from Experian if available to provide an enhanced view of positive financial behavior. The result is the opportunity to increase your credit score based on data you share—even if you have a low FICO® Score or no credit score at all.

FICO® Score XD is a similar product, although it uses other alternative data sources that can demonstrate a consumer’s financial health. Instead of relying on banking information, FICO Score XD uses payment history from telco and utility companies and public records in order to begin building credit. According to recent data, FICO Score XD gives lenders the ability to assess risk of more than 70 percent of consumers applying for credit who do not have enough credit history to receive a standard FICO® Score based upon traditional credit bureau data.

Who should use these services?

According to an Experian report, as many as 62 million Americans have a “thin credit file” or are considered “credit invisibles,” meaning they have very few accounts listed on their credit reports.  These consumers are a key audience for alternative data products.

Thanks to alternative data, those who might’ve otherwise struggled to demonstrate credit can have the chance to begin showing credit history. For example, applying for loans or taking out lines of credit allows consumers to reach milestones such as homeownership, as well as financing purchases like cars and appliances or even everyday needs.

“We’re focused on financial inclusion, and what we’ve introduced can potentially improve access to credit for the majority of Americans who participate in it,” Taylor said of the UltraFICO™ Score in a previous interview with USA Today. “Consumers new to credit along with those who have had previous financial distress, those groups stand to benefit the most from the new UltraFICO Score.”

Pros and cons of using alternative methods to build credit

For the most part, services like the UltraFICO™ Score and Experian Boost do not have any major downsides. You get a shot at having a FICO credit score using alternative data sources with these services, which you may not have without outside help.  At the very most, the investment required on the consumer’s behalf is the time involved in signing up, entering some information and looking up account numbers they can add to their profile.

Finally, consumers should be cautious of any fees involved in building credit using financial service providers. Users should make sure they understand data permissions as well as any fees involved in a service, while fully researching free tools or options that are available.

The bottom line

If you’re struggling to build credit using traditional methods, then you may want to take a closer look at the payments you’re making each month. If you have a bank account or pay utility bills or phone payments, then something like the UltraFICO™ Score, the FICO® Score XD or Experian Boost could help give you a leg up.

However, using alternative data to strengthen your credit history isn’t the end-all-be-all for your credit score. Alternative data can open the door and give you access to credit that lasts, but how you handle your credit from there is up to you.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."
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