Credit scores have been around for decades at this point, and they’re not going anywhere. They’re meant to represent how likely it is that a consumer will pay their bills completely and on time. High credit scores mean lower interest rates and more leeway, lower means the opposite.
The system makes sense on a fundamental level, but has been challenging for Americans practically. Developing credit takes time and an investment in a system which not all Americans are interested in. Using a credit card, opening multiple accounts, buying a home, these aren’t things all Americans care for. Unfortunately, at the same time, these are some of the best ways to increase credit.
This issue is especially bad for consumers who are in exceptional circumstances. New immigrants, divorcees, and young but solitary consumers can struggle to build credit even using the best methods. It’s for all of these people and those that simply don’t want to use credit that alternative data is helpful.
Alternative data is not, and is not trying to, replace typical credit sources and data. Instead it’s meant to look at consumers and their reliability eclectically. Now paying rent on time, paying telephone bills consistently, and utilities can all act as serious considerations. These won’t add more than 10 to 25 points to one’s credit, but this is nothing to scoff at.
What makes those extra points so important is that they raise people up to the realm of credit visibility. Credit invisibility will lead to a complete denial of loans or major hikes in interest rates, which can be crippling. Alternative data helps to prevent this and increases the opportunities for those with no credit.
It’s not the biggest change, but this alternative data could raise over eight million people out of credit invisibility. What this means is that as emergencies arise, loans will be more affordable. As consumers consider purchases, they’ll have more options to choose from. And most importantly as consumers get a start on their credit, they can work on pushing it even further.
