Alternative Data: Your Frequently Asked Questions, Answered

Highlights: 

• Alternative data expands credit access for underserved consumers by providing insights beyond traditional credit files, helping lenders identify creditworthy individuals with thin or no credit history.

• Utilizing alternative data and explainable AI enables businesses to safely grow by tailoring products for established customers and approving new ones, while also identifying and managing potential risks.

What is alternative data? Why does it matter? How can it help consumers? We answered your frequently asked questions about alternative data and its importance below. 

Q: How many people lack traditional credit? 

A: Roughly 76 million American consumers are classified as having thin credit files (meaning they have four or fewer accounts in their credit history) or no credit file, sometimes referred to as credit invisible. Approximately 61 million individuals have thin credit files, while 16 million have no credit file at all. This translates to roughly one in three adults being credit-challenged. 

Q: What are some reasons why people might have little to no credit? 

A: While there are many reasons why an individual may lack a traditional credit history, these individuals are more likely to be: 

• Young adults, just beginning their financial journey

• Recent immigrants who have yet to establish credit

• Recently widowed or divorced and starting a new credit profile

• Cash or debit card users who do not use credit accounts 

Q: How can having thin or no credit impact individuals? 

A: From a mile-high point of view, it can negatively impact their social mobility by blocking access to crucial loans for vehicles and housing, which in turn can impact their employment. Or consider this. A subprime credit score, which could be assigned to an individual with thin credit, could add:

• An additional $32,923 in interest on an average 30-year mortgage compared to a prime score. 

• An additional $400 in interest for a $550 emergency loan over three months.

• An additional $3,000 in interest for a $10,000 used-car loan over four years. 

Q: What is alternative data? 

A: From a credit risk perspective, alternative data provides relevant credit decisioning insights that aren’t typically found in a traditional credit file. It can expand a lender’s view of risk and opportunity by providing a broader understanding of how individuals handle their financial obligations. 

Q: How does alternative data help lenders at new account opening? 

A: Using alternative data, lenders can securely grow their business in various ways. It can help them offer better deals and more tailored products to customers with established credit. Likewise, alternative data fills information gaps with reliable payment insights, enabling the scoring and approval of customers with thin credit files or no credit history. It can also provide insights into hidden or emerging risks, which can help lenders avoid or manage potential payment problems. 

Q: How does alternative data help consumers? 

A: For people with established credit, alternative data can strengthen their profile and open up more financial opportunities. For those who lack a credit history, it can help them qualify for credit and start building their credit score.

Q: What types of alternative data are available through Equifax? 

A: Alternative data available from Equifax spans all aspects of financial health, including financial durability (meaning their ability to withstand financial stress, such as job loss), income, affluence, debt, and credit, and includes: 

• Specialty finance data for short-term installment loans and other short-term loans

• Account payment data from the utility, telecommunications, pay TV, and security industries

• Rent and utility payment data

• Employment history data

• Income data

• Bank transaction data

Q: What is explainable AI and how does it work with alternative data? 

A: Equifax helped set the industry standard for explainable AI (xAI) in financial services, introducing the first machine learning credit scoring system that generates logical and actionable reason codes for consumers. Combining this groundbreaking xAI technology with alternative data enables lenders to safely expand their prospecting and new account opening processes into near-prime and sub-prime audiences, confidently identifying and serving creditworthy individuals who might otherwise be denied or overlooked. It’s a smart, efficient approach to driving secure growth.   

Want to learn more about alternative data? Read our blog breaking down what you should know. 

For more information on how alternative data can help your business, check out the latest alternative data resources.