Topics  |  Reaching Deeper: Using Alternative Data Sources to Increase the Efficacy of Credit Scoring

With consumer debt levels at an all-time high and the credit card and mortgage markets heavily saturated, the financial services industry has begun to turn its attention to the vast untapped pool of consumers who have minimal credit histories but aren’t necessarily poor credit risks. As many as 70 million underbanked Americans are believed to have no credit history, making it difficult for financial institutions to use traditional credit scoring methods for underwriting asset-building products such as personal or auto loans and mortgages. With an eye on new markets, innovation in the financial services industry has led to the creation of products, delivery channels and providers that fall outside the traditional credit reporting system, including prepaid debit cards, remittances, and electronic bill payment solutions. A significant number of innovative pilots and studies are providing the needed momentum to catapult this issue to the top of the financial service industry's agenda. This report describes the current credit reporting system, why it doesn't work for everyone, and efforts underway to improve it with the addition of new data sources.