Credit Risk

Credit Unions: Say “approved” more by looking past traditional credit

Credit Unions: Say “approved” more by looking past traditional credit

September 23, 2022 | Anna Fisher

Confidently serve below-prime members by seeing the bigger picture

Approved. It’s a magic word. Especially for the estimated 77 million Americans who rarely hear it. They are Americans shut out of mainstream financial services due to having little to no credit history. 

How many of your members fit within this category? More importantly, how many times have you missed an opportunity to approve them for much-needed auto loans, personal loans, and mortgages?

Now, imagine being able to confidently serve and lend to 96 percent¹ of your members. This includes those with less-than-perfect credit. You can, with the right approach and access to the right tools. Here, we’ll explain how to look beyond traditional credit. You can do this by using alternative data to reliably test the creditworthiness of nearly all your members. That way, you can say that magic word more often. 

Nearly one-third of consumers face a “chicken-and-egg” problem. 

For many people, the path to traditional credit is an age-old, chicken-and-egg problem. To get credit, you need a prior credit history. But you can’t build a credit history unless you get credit. It’s a trap that snares people of all ages, from all walks of life for a variety of relatable reasons. 

According to Equifax research, nearly one-third of Americans are unbanked, underbanked, have a thin credit file, or are credit invisible (no credit file). Without traditional credit, many are deemed as “unscoreable” using conventional credit scoring practices, or they’re scored as “below prime.” Even though many are capable of handling credit.  

Could a third (or more) of your members be struggling with this challenge? Chances are, it’s a real problem. But, it’s one you can solve. 

Go from a 68% unscoreable rate to 1%? It’s possible. 

Traditional credit reports and scores are powerful predictors of future financial performance; they’re the gold standard for assessing credit risk. Yet, when these tools are augmented with alternative data, it creates a hyper-inclusive resource that can score up to 96 percent of consumers, according to Equifax research. Alternative data is relevant consumer information that’s typically excluded from credit reports. 

Instead of only looking at historical performance, which is what’s reflected in traditional credit reports, alternative data can show you the bigger picture of what’s happening right now in an individual’s day-to-day life. Things like how they manage “everyday bills'' such as utility, cable, and cell phone payments. It can also provide insight into employment stability and income. This is all relevant information that’s proven to be predictive of future account performance for nearly all consumers. 

In fact, the predictive potential of alternative data is backed by a 2021 U.S. Government Accountability Office (GAO) report focused on mortgage lending. The report cites a study that used consumer utility and telecommunications payment data, and found that: 
Among thing-file consumers, the added use of utility data reduced the percentage of unscoreable consumers from about 65% to 4%. 
The added use of telecommunications data reduced the percentage from 68% to less than 1%. 

The report goes on to suggest certain types of alternative data can help to better predict default or delinquency for all consumers. For example, it describes how adding cash flow data, such as bank transaction data, improved the ability of models to predict default risk among borrowers across all credit scores. 

To say it’s powerful stuff is a gross understatement. If your credit union isn’t already evaluating the use of alternative data, it’s time to get started. It’s a smart strategy for helping your members improve their overall credit standing and gain greater access to life-enhancing financial products and services. Likewise, incorporating alternative data into your decisioning approach can better position your credit union as a leading provider of inclusive financial services. This makes them a true advocate for and partner to your community. Or, to put it more simply, it can help you increase the lending “magic” you bring into the lives of ALL your valued members. 

To see the life-changing impact alternative data can have on underserved groups within your credit union, download this FREE white paper: Achieve more inclusive credit: expanding your credit reach to marginalized populations can help them and you. VIEW NOW

Discover four powerful sources of alternative data available to your credit union today, exclusively through Equifax, in this informational blog article: Widen Your Consumer Scope with Alternative Data (equifax.com). 

See how Equifax is supporting credit unions and access additional thought leadership content, LEARN MORE.

1 Equifax Data Analysis

Anna Fisher

Anna Fisher

Vice President, Identity & Fraud Consulting

Anna joined Equifax in 2021 as Vice President, Identity and Fraud Consulting with over 15 years of leadership experience in consulting, sales support, analysis, and client services in the financial, telco, insurance, and property industries. Anna prides herself on surfacing clients’ true, unarticulated needs and drivi[...]