Alternative data

In economic policy, alternative data refers to the inclusion of non-financial payment reporting data in credit files, such as telecom and energy utility payments.

Alternative data in the broadest sense refers to any non-financial information that can be used to estimate the lending risk of an individual. Information includes:

In the United States, credit files include negative information, such as as well as positive information, such as repayment of debts. Still, an estimated 35 to 54 million Americans have insufficient credit information to qualify for mainstream credit. If immigrants in the United States are included, that number exceeds 70 million. Access to credit is thus a Catch-22 for many poor Americans—one needs credit to get credit. Research suggests that the inclusion of alternative data in credit files could bring many of these individuals into the credit fold. That is, non-financial positive payment information, such as rents or utility payments, may give credit agencies enough information to rate previously unscorable individuals known as the unbanked. These newly scored individuals have risk profiles similar to those already in the mainstream credit system. Racial minorities, women, and the poor disproportionally benefit. Furthermore, loans become smarter. Including alternative data has little effect on the credit mainstream, those already scorable in the current system. Furthermore, this increase in data decreases the number of bad loans

Experian purchased RentBureau in June 2010, which houses rental payment histories on over 7 million US residents, this data will now be included in consumer credit reports as of January, 2011. This will benefit those that overlap with the 50 million US underbanked consumers. The danger with this, is that it will provide a further variable to damage credit scores of those that do not for example manage their rental payments on time in addition to their other credit arrangements

Since the financial crisis of late 2008, many Americans have struggled with the negative change to their credit score. Reduced credit lines resulting in a new group of consumers in need of liquidity forced this growing consumer segment to seek alternative financial services providers. Businesses relying on traditional credit reports to make credit decisions have had limited to no visibility on the new credit usage behaviors of this growing portion because alternative data is not information that the traditional bureaus capture or tend to report.

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