Factors that determine credit risk
Factors affecting credit risk can differ according to each credit bureau. However, certain criteria related to a persons’ financial history are always taken into account within a banking institution, such as the record of payments, debts, and credit extension.
This credit evaluation system reduces many good applicants’ possibilities of obtaining a good score. People that are new-to-credit or with little credit history, such as students, immigrants and those who prefer to use cash, have fewer opportunities to receive a loan and are assigned higher interest rates.
Technology has advanced improving different areas of human life, including credit risk assessment systems. Thanks to the effectiveness of alternative data and artificial intelligence, alternative scoring is here to stay, revolutionizing the financial system, changing solvency parameters and bringing more market opportunities for companies.
Alternative information includes a myriad of non-traditional data sources that allow us to learn about peoples’ behaviours through cell phones or digital platforms. Some of the alternative data being used is derived from online purchases; rent payments, taxes, applications, phone bills and mouse movements. This complex web of information is interpreted by machine learning algorithms, which create non-linear behaviour models and thus help make future predictions.
Unlike traditional scores, these new ways of determining credit risk allow a much more complete view of a person's credit profile since the data obtained is from a variety of behavioural sources. Additionally, given that state-of-the-art algorithms are continually learning and updating information, the results are much more accurate than traditional manual analysis.
New credit scores are also more inclusive than the traditional ones when determining solvency. This opens up the opportunity for companies to explore new customer niches, previously unthinkable. So much so that, today, a person with little or no credit history can be reliable enough to receive a loan with favourable interest rates. In this way, underdeveloped countries, where a large number of trustworthy people are outside the financial system, are becoming extremely interesting markets for Fintech companies. This improves not only the profitability of companies, but also the lives of millions of people who wait for the opportunity to change their lives.