A Hybrid Approach: Using Trended and Alternative Data Together for Enhanced Risk Scoring

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Let’s face it, data is a commodity. But there are several things that make data special – the ability to access and incorporate new data sources, and what we do with it. This was the idea behind a risk score that combines both trended credit bureau data and alternative data sources. The combination of this information allows lenders to score with far more precision – competitively important in a time of rapidly evolving consumer behaviors. When a multi-sourced score is applied, many current customers and financing applicants may be assessed as lower credit risks, receive more beneficial pricing, or possibly be approved.

Trended credit behavior and alternative data sources combined create a more precise picture of consumer risk and ability to manage financial commitments. This powerful hybrid approach enhances a point-in-time decision with more precise scoring of future risk. Through recent testing of the solution by a major auto lender, TransUnion identified up to 24% more approvals for the auto lender. Due to the lender’s increased booking rates, the lender could potentially have a 5.7% to 11.5% increase to its portfolio size.

More inclusive lending practices have further accelerated growth in the use of alternative data for targeting, underwriting, and portfolio management. Alternative data is FCRA-compliant data used for credit risk decisions, but not sourced from traditional credit bureau tradeline data.

Working in the alternative data industry and being a part of the first information services company to combine multi-faceted alternative data into core operations, we see first hand the insights and techniques needed to engage, acquire, and include a broader range of consumers. Alternative data can be the key to improving profitability for a lender in a competitive environment by scoring more consumers accurately and making risk-appropriate lending decisions.

Trended data assets leverage an expanded view of credit behavior data on each consumer that includes up to 30 months of historical information on each loan account, plus payment history, amount paid vs. minimum due, and the total amount borrowed over time, for a more holistic view of a consumer’s credit behavior and trends.

Traditionally, credit scores have incorporated one snapshot in time of a consumer’s history of credit usage. Trended data incorporates past history connected over time to indicate risk level based on the trajectory of a consumer’s debt balances, spending and actual payment amount. Historical consumer credit behavior is powerful information that can give a clearer indication of how consumers might pay off their financial debts in the future.

A CreditVision study found that approximately 26.5 million previously unscorable U.S. consumers can be scored in the prime and near prime tiers using a risk score built on trended information. In addition, the super prime customer base could expand by more than 23 million U.S. consumers – that’s 21% of consumers scored as super prime vs. 12% scored in the same tier with traditional risk scores.

According to recent CFSI research, nearly six in 10 Americans are struggling financially. Knowing this, it is more important than ever to deliver innovative solutions that increase lender confidence and consumer access to quality financial services. Whether top-tier banks, community institutions, insurance carriers, or specialty lenders, our customers continue to look for better ways to serve the many millions of Americans seeking a firmer financial foothold.

Financial institutions can now lend to emerging credit populations with greater insight. These groups are often denied by lenders, or subject to less favorable lending terms, because they don’t have sufficient data on their credit files. In fact, more than 60 million traditional “no-hits” and unscorable records can be scored using TransUnion’s solution, CreditVision® Link­ (SM). The innovation of a credit score that combines both trended credit bureau data and alternative data sources ultimately leads to better outcomes for our customers and consumers alike.

Click here for a detailed insight guide about using alternative and trended credit data together.

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