Despite the vast accomplishments of the American credit system, approximately 35 million to 54 million Americans remain outside the credit mainstream. For a variety of reasons, mainstream lenders have too little information on them to evaluate risk and thereby extend credit.
This study offers a feasible market solution to bring those outside the mainstream credit fold within it. Mainstream lenders can use “alternative” or “nontraditional” data, including payment obligations such as rent, gas, electric, insurance, and other recurring obligations, to evaluate the risk profile of a potential borrower.
Although using alternative data in consumer credit reports affects how the data appear in a host of credit scoring models, nothing about the data subjects has changed. What has changed is the availability of information. Whenever an information gap exists, markets fail to thrive. The use of alternative data in consumer (and commercial) credit reports can close an information gap that has negatively affected the lives of millions of thin-file and unscoreable Americans who reside in urban areas and elsewhere.
Alternative data, if widely incorporated into credit reporting, can bridge the information gap on financial risk for millions of Americans. More concretely, considering that many of these millions outside the credit mainstream are poorer, less advantaged Americans, the information can direct markets toward a faster alleviation of poverty in this country.