3 alternative data to credit report for enhancing underwriting quality
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3 alternative data to credit report for enhancing underwriting quality
Last updated July 22, 2024
Eseose Animhiaga
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Globally, lenders primarily rely on credit reports to assess borrowers’ creditworthiness. When borrowers apply for a loan, they submit their details, and credit bureaus provide information on their credit score and history, such as outstanding debts and repayment behavior. This information lets the lender decide whether to approve or reject the loan application.
However, credit reports often fail to provide a clearer picture of a borrower’s financial health. They predominantly focus on the borrower’s character—essentially, their history of managing credit—but neglect other critical aspects.
Consider the 5 C’s of credit: character, capacity, capital, collateral, and conditions. Traditional credit reports mainly address character, leaving gaps in understanding the borrower’s capacity to repay, available capital, collateral assets (for larger loans), and the broader economic conditions affecting them.
Smart lenders must incorporate alternative data sources to improve underwriting and make more informed lending decisions.
By doing so, they can understand a borrower’s ability to repay the loan beyond what credit reports alone can offer. Let’s take a look at three of these alternative data sources:
Bank statement data
Think of a bank statement as a financial diary. It reveals an individual’s spending habits, income patterns, and overall financial health. By examining deposits, withdrawals, and cash flow, lenders can see if a borrower lives within their means and how they manage their money. This rich data can tell a much fuller story than a simple credit score, highlighting financial discipline and stability.
When it comes to consumer loans, knowing who to avoid can be just as important as knowing who to trust. Private blacklists are often maintained by lending technology providers. For example, Lendsqr’s private blacklist – Karma, offers a treasure trove of information. Unlike public credit bureaus that might have outdated or incomplete records, these blacklists can provide the latest data on borrowers with a history of defaults or fraudulent activities. This helps lenders identify risky applicants who might slip through the cracks of traditional credit reporting.
Your phone knows a lot about you – where you go, what you browse, and even how you spend your free time. For lenders, this mobile data can be a goldmine. Lenders can get a detailed picture of a borrower’s lifestyle and reliability by analysing location data, app usage, and social interactions. This unconventional data source offers unique insights, particularly valuable for those without a solid credit history, helping lenders gauge creditworthiness in a more nuanced way. All with borrowers’ consent, of course!
While credit reports are the go-to for assessing borrower creditworthiness, they don’t always tell the whole story. As a smart lender, you know that understanding your borrowers goes beyond just their credit scores. That’s where alternative data comes in, giving you a fuller, richer picture of their financial health.
Think of bank statements as a financial diary, revealing spending habits and income patterns that credit reports miss. Private blacklists, like Lendsqr’s Karma, keep you informed about risky applicants who might otherwise slip through the cracks. And mobile phone data? It offers unique insights into a borrower’s lifestyle and reliability, especially valuable for those without a solid credit history.
By tapping into these alternative data sources, you can make more informed lending decisions and reduce the risk of defaults. Ready to take your underwriting to the next level? Send us a message at growth@lendsqr.com.
Lendsqr already integrates with Freshchat for seamless chat support – but are there other Freshchat alternatives that offer even more flexibility for lenders?
