How alternative credit scoring helps borrowers build full credit files in USA

June 11, 2021

According to a 2021 study by University of Essex researcher Peterson Ozili, financial inclusion in the United States is improving significantly and helping eradicate poverty and increase prosperity. The US government has deployed over 800 community development financial institutions meant to boost financial inclusion in the country, especially in rural and distant areas. 


Moreover, financial technology or fintech companies are greatly contributing to the modernization of traditional financial services, finally banking the previously unbanked Americans and enhancing banking services for banked Americans as well. Of course, some of these traditional services are lending and credit scoring.


When you apply for a credit or loan, financial institutions look at different factors to gauge if you’re well-equipped to handle long-term financial responsibilities. One of those factors is, of course, credit score, which is then stored in a credit file―a collection of data about an individual’s credit and payment history. Lenders typically look at credit files to check if borrowers appear to be a good or bad credit risk.


There are three categories of credit files: full file, thin file, and no-hit. Full files refer to credit files with sufficient recent tradeline data to generate a traditional credit score. Meanwhile, a thin file contains insufficient and/or outdated tradeline data to generate a traditional credit score. Lastly, a no-hit refers to no information or file on the person at all.


In this blog, we’ll focus on thin files, how it’s relevant in financial inclusion in the US, and how alternative credit scoring comes into play.


What is a thin file?

As mentioned earlier, a thin credit file is a credit report of an individual who has little to no activity. This is often the case for people like young adults who are just starting out with borrowing money for big investments. In some cases, parents appoint their teenage children as authorized users on their credit cards to help build their children's credit files before they turn 18 and eventually give them a positive credit score once they become adults. Around 17% of preteens in America are authorized users on their parents' credit card accounts.


Aside from young adults, people who have thin files are those who have had little need for credit or those whose accounts fall off their credit reports after seven years due to inactivity. Data shows that 62 million Americans have a thin credit file, with typically only one to four credit accounts listed on their credit reports.


Lastly, most immigrants also have a thin credit file due to the fact that the US measures credit differently than other countries and the data, no matter how great they may be, is not usually transferable.


While having a thin credit file differs entirely from having bad credit, a thin file may still prove disadvantageous to individuals applying for loans. Lenders will most likely deny their applications if they have little to now credit history to show. Thus, borrowers must make it a point to turn their thin files into full files should they require credit when they need it.


How alternative credit scoring turn thin files into full files


Fortunately, many fintech solutions today make it possible for borrowers to enhance their credit files, raise their credit scores, and eventually borrow money to meet their finance and investment goals. Alternative credit scoring solutions, in particular, prove to be instrumental in this matter, which is good news for Americans today especially with the new administration. 


US President Joe Biden plans to focus finance-related regulations on alternative credit data, big-bank oversight, and fair lending during his administration. This is due to the economic effects of the COVID-19 pandemic where student loans and mortgage payments have been paused, putting gaps in consumers’ credit history. According to John Pitts, head of policy at Plaid, the gaps will be a year's worth of irrelevant information on people’s credit reports, which is uncommon in the US. However, he believes that fintech solutions and companies will play a big part in helping financial regulators protect consumers.


Credit agencies also see alternative credit data as a way for Americans with low income and  are typically locked out of traditional credit to finally raise their credit scores and expand their credit files. In this modern age, alternative credit data has also helped borrowers build digital credit scores, making it more convenient for them to eventually apply for credit or loans.


Fintech companies such as Credolab, for example, use alternative data for embedded credit scoring and bank-grade digital credit scorecards to help typically overlooked borrowers build their credit scores. Its credit scoring app, Credoapp, makes it possible for anyone to build a digital credit score, which they can present to the participating bank they’ve chosen to apply to.


With alternative credit scoring solutions just a click away, the possibilities are simply endless for borrowers today.


Evidently, fintech has greatly changed the world for the better, and it will undoubtedly continue to do so as hundreds of nations continue to experience the economic effects of the pandemic. Applying for loans and credit used to be a tedious task to do, but alternative data and digital credit scoring companies now beg to differ.