Giving Compass' Take:
- Karan Kaul explains that using alternative data in credit scoring can open up credit to more than 50 million people who do not currently have access.
- What role can donors play in expanding financial access to marginalized populations?
- Read about financial inclusion and the SDGs.
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Even though credit scores play a key role in determining who gets a mortgage and at what terms, the current credit system disadvantages a disproportionate share of low-income consumers who don’t have enough information in their credit files. To better allow these consumers to access credit or access it at better terms, lenders can leverage alternative data not found in traditional consumer credit reports.
These consumers are disproportionately people of color who, by choice or circumstance, manage their financial lives mostly with cash. Without using credit, they don’t have credit scores or have subpar scores. This can compound historic inequities and prevent them from accessing the generational wealth-building opportunities available via homeownership and other credit opportunities. As of October 2020, 31.5 percent of Hispanic consumers and 45.1 percent of Black consumers had subprime credit scores, but only 18.3 percent of white borrowers did. Using alternative data could provide an on-ramp that could allow many of these consumers to improve their credit prospects.
Experts from government, nonprofits, and industry discussed the benefits of alternative data at a recent Urban Institute virtual event moderated by Laurie Goodman, vice president for housing finance policy at Urban. These data could enable credit scoring for more than 50 million currently unscoreable consumers and raise credit scores for those with thin files.
Alternative data could improve the accuracy and fairness of credit scoring
During the event, speakers unanimously stressed the need for greater use of alternative data, particularly data that consumers have specifically granted potential lenders access, or “consumer-permissioned data.” Keynote speaker Grovetta Gardineer, senior deputy comptroller for bank supervision policy at the Office of the Comptroller of the Currency (OCC), emphasized that millions of consumers without traditional credit scores “may be hard-working, responsible people who regularly pay their bills on time” and could be deemed creditworthy if scored using “their full financial record.” These records could include history of paying monthly rent, utilities, and cell phone bills, as well as consumers’ general management of deposit account cash balances.
Read the full article about alternative data in credit scoring by Karan Kaul at Urban Institute.