Using alternative data to evaluate creditworthiness

Without credit, it is nearly impossible to buy a home or start a business. People face barriers to accessing credit or have to pay more for credit for several reasons. Some people have negative items, such as a record of late payments, on their credit report. Other people have trouble documenting their income.

Still others have either no credit history or credit history that is too scarce or “thin” to generate a credit score. This issue affects an estimated 45 million Americans and more often affects African-American, Hispanic, and low-income consumers. 

Some lenders and financial technology (“fintech”) companies are looking to use alternative forms of data and newer methods of analyzing that data to assess an applicant’s creditworthiness. These innovations could expand access to credit, especially for people with thin credit histories. But like any innovation, there may be risks and unintended consequences, too.   

We’re looking into the promises and pitfalls of these innovations and the steps players in this market are taking to harness the benefits while managing the risks. 

What is alternative data and what are some kinds lenders might use?

In the consumer financial marketplace, alternative data refers to information used to evaluate creditworthiness that is not usually part of a credit report. Some examples include:

• Rent payments
• Mobile phone payments
• Cable TV payments
• Bank account information, such as deposits, withdrawals or transfers 

Other types of alternative data might relate to things less closely tied to a person’s financial conduct, like that person’s education or occupation. Some lenders have even considered using data from social media and the ways in which a person interacts with a website.

What are the pros and cons of using alternative data?

Using alternative data has the potential to help expand responsible access to credit among the estimated 45 million people who lack a traditional credit score. For example, someone without a loan repayment history on their credit report might pay other bills or recurring charges on a regular basis. These bill payment histories might demonstrate to some lenders that the person will repay a debt as agreed. We will explore other potential benefits from using alternative data, including:

• Improved assessments of creditworthiness. For example, some lenders might not lend to a person with a credit score less than 620. Some of those lenders might be willing to do so if they could determine which people are less likely to default on the loan by looking at other sources of data.
• More timely information. Data traditionally used by lenders often does not reflect a person’s most recent activities. Alternative data could provide more up-to-date, real-time information.
• Better service and convenience. Some kinds of alternative data, such as online bank account information, may allow lenders to automate tasks that are done manually during the loan approval process. This automation might speed up application processes or avoid subjective interpretations that may sometimes lead to differences in treatment or wrongful discrimination.  
• Lower costs. Using alternative data could lower costs for lenders, and in turn, benefit consumers through lower prices.

We will also explore potential pitfalls to using and analyzing alternative information sources, including:

• Inaccurate or incomplete information. Though traditional data can also be inaccurate, certain types of alternative data may be more prone to errors if standards governing those data are different or weaker than those governing traditional data. Consumers might not be able to access or view some types of alternative data. This could prevent consumers from finding and correcting any inaccuracies. 
• Difficulties in achieving good standing. Traditional credit factors are heavily influenced by a person’s own financial conduct. Some alternative data may not be related to a person’s own financial conduct and the use of these data could make it more difficult for people to improve their credit standing. Alternative credit factors may also be harder to explain to people seeking credit. 
• Unintended side effects. The use of alternative data could penalize or reward certain groups or behaviors in ways that are hard to predict. For example, members of the military may frequently move and that may give a false impression of instability that could affect whether they can access credit.
• The potential for discrimination. Using alternative data may present a greater risk of unlawful discrimination if new variables or factors are more closely related to a factor that can’t be used under the law (such as race, ethnicity, or gender).

How can people tell when alternative data is being used to make decisions about them in the consumer financial marketplace?

Good question. Lenders may need to tell you the most important reasons why they declined your credit application. They may also need to let you know who provided information about you (and how to contact them), your credit score, and the key factors that may have lowered your credit score. When you apply for a loan, lenders may ask for non-traditional information in the application or ask you for permission to access alternative sources of information, like your bank account transaction information. These are some ways you may learn about the types of data lenders use to make decisions.

What the CFPB is doing

Today, we released a Request for Information that seeks information on alternative data and the techniques used to analyze these data. We are seeking public feedback on the benefits and risks of using alternative data sources in making lending decisions. We are also interested in encouraging ways to extend affordable, responsible lending to more people, while at the same time ensuring companies play by the same rules so that consumers are treated fairly and protected.

Add your voice

• Do you have little or no credit history? 
• Have you struggled building credit? 
• Were you able to get credit by supplementing your credit history with other information? What type of information did the lender ask for or consider to supplement your credit history?
• Were you evaluated for credit or denied credit and didn’t understand how or why certain types of information were used? 

Do any of these questions apply to you? We would like your feedback. 

To see and respond to the full range of questions we’re interested in learning about, visit our formal Request for Information.