For years, banks have relied on the FICO credit score to determine whether a customer is eligible for everything from a credit card to a home loan. And while we don’t know the secret recipe that makes up the FICO credit scoring model, we do have a high-level understanding that this model relies on payment history, the amount owed, length of history, type of credit used and new credit.
But there’s a growing problem with relying solely on these factors to determine a potential customer’s credit risk. In a recent FICO Decisions research white paper, Can Alternative Data Expand Credit Access, it was found that FICO has incomplete or no data on over 50 million Americans. This means that 50 million Americans cannot qualify for loans under the previously listed determining factors. That’s where alternative data steps in.
We sat down with eCredable CEO, Steve Ely, to understand what alternative data is, and how it can help millions of underbanked or unbanked Americans qualify for credit opportunities. Read on to learn more about alternative data and how it could change the credit scoring game.
Q: Let’s start simple, how does someone build credit?
A: For the past few decades, the answer to this question usually includes three pieces of advice: 1) open a secured credit card, 2) get a starter loan, and 3) ask someone to add you as an authorized user on their credit card. Each of these actions should result in new information - like your monthly payment - being included in your credit report to help you build a credit score. Ideally, you would want this information being reported to all three national credit bureaus - Equifax, Experian, and TransUnion.
Q: What about those who are defined as underbanked or unbanked? Who are they?
A: A consumer is considered unbanked or underbanked when they are unable to access what most people call “mainstream financial services” from traditional banks or credit unions. These consumers might be using Check Cashers to cash checks instead of using a regular bank. The reasons vary, but it’s usually because they either don’t qualify to be a customer of a traditional bank, or they did something wrong to cause a bank not to want them as a customer any longer (e.g. too many overdrafts).
Most consumers in this category tend to pay more for their financial services. Check Cashers always charge a fee for their service, whereas your bank would not typically charge you to cash or deposit a check. If we can help these consumers build a financial profile that would allow them access to traditional financial services, they would probably save money. Many of these consumers may not have a credit file, or their credit file is so "thin" that there's not enough information present to create a traditional credit score. If you don't have a credit score, you probably won't be able to get approved for a credit offer from a bank.
Q: So, what happens if I need to get a car loan, mortgage or even a credit card and I’m someone who has a thin or nonexistent file? What can I do to prove I’m not a credit risk?
A: A great way to get started building your credit score is with eCredable Lift. We use Urjanet to access your payment history for phone and utility accounts so we can report them to TransUnion – one of three national credit bureaus. Once your payment history is added to your credit report, it will help you build a traditional credit score – like a FICO Score or VantageScore – assuming you pay your bills on time.
You can take advantage of all the bills you pay on time like mobile phone, internet, landline, cable TV, satellite TV, gas, water, power, and waste. Even reporting one account can help you create your first credit score. If you already have a credit score, adding more positive information could help you get a better credit score.
Q: But is this really reliable data?
A: Absolutely! FICO and VantageScore collaborated with three of the major credit bureaus to understand and assess the impact this kind of information would have on your credit scores. If you have no information in your credit report(s), this new data will have a very significant impact. If you have limited information in your credit report(s), this new data will have an impact but it will vary significantly depending upon your circumstances. If you have a lot of information your credit reports – like mortgage loans, car loans, and credit cards – you won’t see much impact if any.
Q: How do you get access to this data? Is this secure?
A: Absolutely. We ask consumers to opt-in to share their credentials for their various utility and telecom bills. Some consumers might hesitate to provide this information, but we’re confident most consumers will see the value we offer in exchange for sharing their log-in credentials. And we’re not asking for access to your bank account. That’s a really big ask and many consumers just won’t share bank account credentials which is understandable.
But accessing someone’s cell phone bill or power bill isn’t going to put them at risk. We are a certified data furnisher and follow very strict regulations that dictate how we manage and safeguard consumer information. Urjanet has developed a very secure access network which we have a lot of confidence in.
As a growing segment of the American population desires to do business with mainstream financial services, the need for an alternative source of data to qualify these consumers for tradelines also grows. With the right data, companies like eCredable are able to break through the traditional methods of updating credit reports and allow the consumer to participate in contributing new types of data to their credit reports.