Can Alternative Data Improve Creditworthiness?

Alternative data is one of the most underutilized forms of credit scoring. Yet, ironically, it can be used to determine appropriate payment amounts, reduce fraud risks, and evaluate other aspects of customer behaviors that traditional credit scores cannot measure.

?Lenders and credit bureaus can use alternative data to find new customers who were previously underserved because of their lack of a traditional credit score.

The accuracy of alternative data seems to be doubted by many. Many ask, “Can Alternative data truly improve creditworthiness?”

Alternative Credit Scoring Vs Traditional Credit Scoring??

Credit scoring attempts to predict a customer’s likelihood of defaulting and how much of a loss that might cause. Historically, credit scores have been tied to the amount of credit available and the risk of default. However, lenders rarely apply credit models in a truly scientific manner, relying instead on characteristics such as bill-to-income ratios and past payment history.

Alternative data can help bridge the gap between traditional credit scoring and how alternative data is used in modern scoring models. Its data sources can be used to improve access to credit for millions of Africans.?

Traditional and alternative credit scoring methods effectively predict risk but have different strengths and weaknesses.?

Traditional credit scoring methods are limited because they cannot differentiate between risks. This limitation is an issue in today’s marketplace, where alternative credit scoring methodologies will be able to enhance the current state of affairs. This is done by increasing the accuracy of existing scores (resulting in better risk separation) and making many of the present credit Invisibles of the current apparent.

Can Alternative Data Improve Creditworthiness?

Alternative credit data is becoming an increasingly important source of information for lenders, and many lenders are using alternative credit data to evaluate the risk of an applicant’s loan.

Alternative credit scoring is a risk-based credit scoring system that extracts information from other variables and uses it to increase accuracy in screening applicants. These data range from an individual’s financial status or type of employment to details like online browsing history, social media activity and workplace behavior.

A predictive model is built with traditional credit reports and alternative credit factors like identity verification, new mortgage application, retail purchases, and more to help lenders identify risk. It allows you to build a more accurate scoring model than traditional reporting alone.

The ability of banks to evaluate creditworthiness can be impeded by the absence of standard credit history data. Alternative data enhance credit risk modeling by identifying potentially hazardous consumers. Moreover, lenders may detect dangerous persons even in the absence of past data.

Visit our blog to learn more about assessing creditworthiness with alternative data.?