Young People Are Entering the Credit World: Here’s How to Approve More Gen Z With Alternative Data

For many young adults, getting their first credit card, car loan, or personal loan is an important milestone. However, for lenders, these same young applicants often present a challenge: a thin or nonexistent credit file. Without a traditional credit history, Gen Z borrowers frequently struggle to gain approval, despite having financial habits that indicate creditworthiness.

This gap in traditional credit evaluation could mean lenders are missing out on a significant portion of potential account openings. The solution? Alternative data.

The Challenge: Thin or No Credit Files

Most lenders rely heavily on traditional credit reports and scores to determine an applicant’s ability to repay. But young people entering the credit world often don’t have enough borrowing history to generate a strong credit score — or a credit score at all. This doesn’t necessarily mean they aren’t responsible with their finances; it just means they haven’t had the opportunity to build credit in the way previous generations did.

Gen Z is more likely to use debit cards, digital wallets, and buy-now-pay-later (BNPL) services instead of traditional credit products. These behaviors, while financially responsible, don’t contribute to their credit history under traditional models. The result? They are often seen as high-risk borrowers, even when their financial habits suggest otherwise.

The Opportunity: Expanding Credit Access with Alternative Data

Rather than rejecting these applicants outright, lenders can turn to alternative data to gain a clearer picture of Gen Zers’ financial responsibility. In fact, Equifax led the way toward an industry standard for explainable AI in financial services, introducing the first machine learning credit scoring system with the ability to generate logical and actionable reason codes for consumers through EFX.AI.¹

Alternative data includes nontraditional financial information that provides valuable insights into an individual’s ability to manage money and meet obligations, and it’s why Equifax created OneScore. Here are some key types of alternative data that can help lenders make better-informed decisions:

1. Utility and phone bill payments

While utilities and mobile phone bills aren’t typically reported to credit bureaus, they are recurring financial obligations. A history of on-time payments for electricity, water, internet, and mobile services can demonstrate responsible financial behavior. In fact, 6.5 million U.S. customers would be able to move from unscorable to scorable with consumer telco and utility data.1

2. Employment and income data

Employment history and income level provide direct insight into an applicant’s ability to repay a loan. Young professionals with stable jobs and steady income may still lack traditional credit histories, but their earnings and employment tenure can be strong indicators of creditworthiness.

3. Specialty finance data

Alternative financial services, such as short-term installment loans, lease-to-own agreements, and BNPL transactions, also contribute to financial behavior patterns. Responsible use of these services can offer a broader perspective on how a potential borrower manages credit-like obligations.

A Complementary Approach, Not a Replacement

While alternative data is a powerful tool for evaluating creditworthiness, it should complement — not replace — traditional credit assessments. Credit scores and reports remain critical in lending decisions, but incorporating alternative data can expand access to credit for those who may otherwise be overlooked. OneScore includes the option to add Equifax traditional Core Credit data into the scoring model.

For lenders, leveraging both traditional and alternative data presents an opportunity to

• Approve more creditworthy applicants, increasing their customer base

• Reduce risk by gaining a fuller picture of an applicant’s financial habits

• Stay competitive in a rapidly evolving lending landscape

The Future of Credit Evaluation

Gen Z is already shaping the future of finance with their digital-first approach to banking and payments. Lenders who adapt by integrating alternative data into their credit decision-making processes will not only capture a larger share of this emerging market but also build relationships with lifelong customers.

By recognizing responsible financial behavior beyond traditional credit files, lenders can ensure that more young people gain access to the credit they need to build their futures — without unnecessary barriers. 

Interested in learning more? Read more on Gen Z’s role in the world of credit and check out this blog to discover more about what OneScore can do for you. 

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Sources: 

1. Equifax: Access to Credit and Alternative Data Report, 2023

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