Credit Services Need to Incorporate Alternative Data for Accurate Scoring

Having a good credit score is one of those things that most every American thinks about from the time they enter adulthood onward, because in the US, good credit is what puts you in the best financial position for lower interest rates, access to home and business loans, and acceptance for car loans, among other things. Not only that, but even employers and landlords will check credit history as a reflection of the person applying for a job or housing. 

Living with poor credit is not only difficult when it comes to needing access to loans, etc. It’s also something that continues to feed into the poverty of those already impoverished. A poor credit score automatically means higher interest rates on anything where interest applies. It also means using expensive financial services, should an emergency arise. Services such as check cashing or pawn shop loans come with a hefty price tag. 

Unfortunately, those who consistently make good on things like utility bills and rent payments still are not able to advance their credit scores, as traditional credit reports don’t include these kinds of data. In other words, even people who have a reputable history still cannot get accepted for things like credit cards and still can’t build their credit scores. Thus this demographic is caught in a financial cycle that will not allow them to move forward. 

Since one out of every five Americans simply has no credit history to build a score on, this issue should take priority in the financial industry. By incorporating alternative data into credit scoring, 90% of those who are currently unscorable could become so, and almost half of them would be scored as prime or near prime borrowers. 

This means that the underserved demographic, including young people who are new to credit, recent immigrants, Hispanics, African Americans, and others, would finally be able to build credit based on their actual financial reputation, rather than a scale that simply fails to measure them at all.