Alternative Credit Score
Alternative Credit Score – An Overview
The term “alternative credit score” refers to the utilization of data on consumer behavior from digital platforms and applications for credit risk assessment. Credit bureaus used to be the only source of consumer credit data that lending institutions could utilize to lower bad debt and market risk.
Alternative credit score exemplifies the potential value of integrating information from several sources, such as airtime consumption, mobile money usage, geolocation, payment history for past invoices, and social media activity.
Alternative credit scoring offers inexpensive loans and access to the credit system to people who previously unable to get credit, giving them the much-needed break, they need to begin building their credit ratings.
By employing alternative credit scores to give credit to this new target group, it assists lenders in reaching out to the underbanked segments of the population. Based on borrowers' alternative credit scores, this lowers interest rates for both borrowers and alternative lenders.
Alternative credit score as a method for credit scoring with a wide application was developed as a result of the advent of various credit scoring paths. This new system, according to industry analysts can break the limitations imposed by traditional financial regulating organizations like CIBIL.
What is an Alternative Credit Score?
What is an Alternative Credit Score – How it works
Now as you are briefed about what is alternative credit score then you should also know how alternative credit score works. Three crucial criteria form the basis of alternative credit scoring such as:
- Ability
- Stability
- Willingness
Credit rating companies employ an applicant's social and digital data to determine the above-mentioned components or criteria, while focusing on variables other than CIBIL ratings. These factors include the borrower’s capacity and readiness to repay the loan, as well as their financial stability and ability to make full payback.
Credit rating firms utilize methods that are based on the data sets as mentioned below to generate alternative credit scores.
- Payment of utility bills
- Financial information
- Payments for telecom
- Lease and rental payments
The scores are generated using Artificial Learning and Machine Learning. The bills payment histories demonstrate the applicant's willingness and capacity to make the required payments on time. In contrast to a standard credit report, the alternative credit score provides a transparent reflection of a person’s creditworthiness.
The benefits of alternative credit scoring – What are they?
Alternative credit scoring as per the fintech experts of FIA Global Services (the leading business correspondent services provider) makes it easier for those who have trouble accessing credit to borrow money and participate in the credit system. It gives individuals a chance to begin repairing their credit ratings.
Alternative credit scoring gives lenders access to those segments of the population who are frequently turned down for loans or credit. Lenders can offer credit to this set of consumers with the use of alternative credit ratings.
Based on alternative credit ratings, this technique also reduces the loan risk for lenders and decreases interest rates for consumers. The scenario benefits both lenders and borrowers.
Conclusion
In the United States, alternative credit scoring has already gained wide acceptance and has greatly benefited both fintech-powered lenders and new customers by making credit available. According to industry experts, the financing environment in emerging nations like China and India is expected to shift as a result of alternative credit scores.
