What’s the secret to scoring more of the consumers who don’t currently have FICO® Scores? Supplementing credit bureau data with alternative data, which—as I disclosed in my last post—enabled us to accurately score more than 50% of previously unscorable credit applicants.
A key reason there’s an opportunity to score more consumers today is the growing number of alternative data providers that have entered the market in recent years. But not all provide equal value for credit scoring.
Consider telecommunications payment data. It has many similar qualities as data reported in traditional credit files. In fact, telecom companies occasionally report customer account status to credit bureaus. Yet this information is present in less than 10% of bureau files—and when it is present, it often reflects negative payment history.
More complete telecom data is available from alternative sources—and it includes positive as well as negative information. That’s important for expanding credit access since it may provide current evidence of good financial behavior where that’s missing from bureau files. For consumers with no credit history and others emerging from financial problems, opening a telecom account can be a first step in establishing or re-establishing creditworthiness.
Property and public record data is another good example of useful alternative data. These data sources tend to be inclusive of large groups of consumers, and can provide both positive as well as negative information that relate to credit risk.
Based on our research and experience, alternative data sources must demonstrate that they make the grade across several important dimensions:
- Regulatory compliance. Any data source must comply with all regulations governing consumer credit evaluation. It’s also critical to think ahead about how creditors will communicate with consumers: Will credit decisions be palatable and defensible? Can the role the data plays be clearly explained to consumers and regulators?
- Depth of information. The deeper and broader the data, the greater its value. Consider a repository of rental data: Does the data reflect both on-time and late payments? Is the full rental history captured or just a recent period?
- Scope and consistency of coverage. Since the goal is to score as many consumers as possible, useful databases must cover a broad percent of the population. For instance, with over 90% of US adults using cell phones, mobile companies are a potential data source with broad coverage. The data must also be consistent in nature—not undergoing significant change that would undercut its value for comparative analysis.
- Accuracy. Inaccurate data compromises its predictiveness and, therefore, its value. Data repositories must follow mature data management processes to ensure accuracy.
- Predictiveness. The data should predict future consumer repayment behavior. For example, analysis of public record databases shows that, in many cases, consumers who have been at their addresses for longer periods are more likely to pay credit obligations than those more transient.
- Additive value—aka “orthogonality.” Useful data sources should be supplemental or complementary to what’s in credit bureau reports. For example, if a repository collects only foreclosure data from public record information, that data may add little value since it is already largely captured in bureau reports.
The data sources behind our new FICO® Score based on alternative data passed these hurdles.
We’ve just completed extensive research on the topic of alternative data in credit scoring. If you’re interested to learn more about our findings, I invite you to read the Insights white paper: Can Alternative Data Expand Credit Access?