Aug 11, 2021
Credit scores enable access to credit and are also the yardstick with which different companies evaluate the type of service they offer to various clients. In this sense, an adequate score can help an applicant get good deals on car purchases, credit cards, telephone plans, insurance policies, among others. Conversely, having a low credit rating can lead to much higher prices or deprivation of the product or service.
A credit score is an identifying number that shows a person's creditworthiness. Most people don't have just one score; they have many, which change all the time. Moreover, they are obtained free of charge since this information works as a risk index for numerous companies or organizations.
Traditional scoring models evaluate credit risk based on the following information:
However, these credit studies are somewhat limited since they are only based on data from people within the banking system. Thus, millions of people - trustworthy but outside the banking system - are excluded from the rating models, losing the possibility of acquiring a loan and accessing better offers of products or services.
Alternative credit scoring arises from the need to include individuals who are creditworthy, but who for various reasons - for example, age or because they prefer to use cash - are unbanked and therefore not rated.
Unlike traditional data, this advanced credit scoring includes new data sources related to people's behaviours such as rental payment and subscriptions, online purchases, social network behaviours, among others. Furthermore, alternative credit scoring uses artificial intelligence to process this data and generate prediction models that are more accurate than traditional sources.
In recent years, this type of credit rating has become increasingly popular due to the benefits it brings to both the client and the lender:
Alternative credit analysis offers a new market for companies eager to provide their product or service to people who are not yet in the system. These people can now be evaluated based on their payment discipline and behaviour, increasing the client base.
Through automated alternative credit rating processes, companies can minimize the costs of acquiring a customer and thus reduce rates, making these accessible to prospects.
Currently, applicants who receive approvals for loans or services based on past credit information may be subject to higher fees since insufficient information results in low credit scores, and thus companies rate these prospects as high-risk clients. But with alternative credit scoring with real-time data, these prospects have the opportunity to get better deals.
In short, the future looks more promising for potential borrowers. Alternative scoring helps break the vicious exclusion circle, giving people the possibility of accessing a system that can significantly increase their possibilities. Likewise, it allows companies to access new markets and present better offers, reducing risk and making informed decisions.
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How to Combine Digital Footprint Lookups with Behavioural Data to Turbocharge Credit Scoring