Having a positive credit score can be the key to achieving financial freedom. Unfortunately, millions of Americans are unable to enjoy this luxury under the confines of a traditional credit file. Alternative data is now being used to combat this, giving businesses a better glimpse into the lives of the consumers that they serve. This helps both the consumer and the business, creating a mutually beneficial relationship that caters to the current economic state of the United States. 

The Use of Alternative Data

Alternative data, defined as any data that is not traditionally recognized in credit reporting, most commonly refers to specialty finance data and telco or utility data. Because most Americans have some form of bill to their name, including this data in a credit file can make the previously unscorable consumer, scorable. Whether it is paying back a loan, keeping up with utility payments, or any other kind of non-traditional lending, alternative data can help to bolster and prove the financial credibility of millions of Americans.

Having a thin or invisible credit file can present a slew of issues for many different groups of people. 1 in 3 adults suffer from this, and the consequences can be costly. For example, many of those who struggle with a lack of credit have to rely on higher cost alternatives. In addition, a subprime credit score can bring an additional over $32,000 in interest on an average 30 year mortgage. A shocking 57% of Americans have reported being unable to pay unexpected expenses from their savings. This has led most people to use credit cards, some to borrow from others, and some even to take out a personal loan. 1 in 3 Americans currently have more credit card debt than they do in their savings, and the time for change is now.

A Shift is Coming

The biggest shift that the addition of alternative data to the credit file will cause is the creation of a more inclusive economy. Studies have shown that an incremental 2 million consumers could qualify for prime offers, and even more will enter scorable credit brackets. Especially when artificial intelligence is layered, machine learning algorithms can utilize a credit scoring system to generate logical outcomes for consumers. Experts have also found that with telco data alone, individuals have experienced positive credit score changes up to 25 points above their original score. Under this new system, nearly 7 million U.S. consumers would be able to move from scorable to scorable, generating exponentially more financial opportunity.

Conclusion

The traditional method of generating and assigning credit scores is still a reliable guideline when determining financial responsibility. However, as time moves on, the credit industry must evolve with it, working towards a more expansive and inclusive way of operating. Now, those with previously thin credit files can bolster their repertoire, and those who were credit invisible can start their journey to financial freedom. Layering AI and alternative data onto the current considerations for financial reliability will support more people than ever before, fostering a thriving and inclusive economy.