Many businesses rely upon credit-related evaluations of consumers to make their decisions on a daily basis. However, if they’re making these decisions based upon traditional credit data, that’s likely locking them out of being able to examine more than 1 in 8 Americans. And many of those prospective customers are likely to be younger adults.
The fact of the matter is that there are more than 40 million Americans who do not have credit histories which are sufficient to provide an accurate traditional credit score. That’s because they either have a borrowing history that was so far in the past as to be unscorable or just haven’t had access to credit at all. That, in turn, tends to prevent them not only from being able to borrow at reasonable rates with minimal fees but also from access to other things like services and even jobs. Typically, these issues impact the Americans with the lowest incomes, which can only serve to create more problems for them financially.
A potentially bigger issue?
This might be particularly problematic when it comes to businesses that are looking to deal specifically with young people. The fact of the matter is that many millennials are likewise not going to have much of a borrowing history to their names because they are so young. In addition, many have eschewed the use of traditional credit whenever possible, as a result of the economic downturn and resulting financial difficulties. Many more just may not want to be tied to much more debt than their student loans as they move forward in a slowly improving economy. In any event, many young people will likely be unscorable, or carry extremely low scores, when examined via traditional means.
As such, it would probably be wise for many businesses that evaluate credit to actually start evaluating alternative credit instead. Doing so is wise because these ratings tend to be far more inclusive – and accurate – than traditional credit scoring models, because of what they examine. That’s because the data includes not just how a person handles credit, but also how they manage their other monthly bills like those for rent, utilities, cell phones, and more. Many consumer experts agree that this helps to paint a far more complete picture of how a person handles his or her finances overall.
In addition to bringing more people into the fold, the use of alternative credit scores can also help to unlock better, more complete credit histories for consumers who have run into borrowing difficulties in the past but who have otherwise been able to keep their other financial obligations. For instance, if a person missed even one credit card payment, their traditional score can fall sharply if they don’t have many (or any) other accounts. However, those who self-report to alternative credit scoring companies will have that blip show up as part of a richer tapestry comprised of all their monthly financial dealings.
Author: Sean Albert – SVP & Chief Marketing Officer MicroBilt Corporation