Ever since the birth of our son, at the end of each year my wife puts together a scrapbook. She chooses her favorite pictures of our recent adventures, includes mementos like artwork and ticket stubs, and adds notes about funny things our son has said and his favorite things.
This book is well beyond a single snapshot and even more vivid than the photo albums my mom kept when I was young. This got me thinking…
The traditional credit report is like a snapshot
We often talk about traditional credit in terms of a snapshot or picture of a consumer. That picture may capture a favorite shirt or hairstyle at that moment, however, a picture taken in January might look much different than one taken the following November. In the same way, a traditional credit score captures your credit profile at a specific point in time, but doesn’t inform on how it evolves.
Trended credit data is like a photo album
Over time, styles and people change. So a photo album of pictures throughout the year would more richly represent how you’ve changed, than just a single snapshot. Trended data is like a photo album of a consumer’s credit score. It incorporates more than two years of account history so lenders have a view into behavior over time.
Trended credit data plus alternative data is like a scrapbook
A photo album can tell a really good story, but when you add ticket stubs, personal artwork or notes on favorite things, your interests and experiences really come to life. Those extra pieces of information are like alternative data. In credit, those ticket stubs would be alternative data, such as property tax and deed records, checking and debit account history, payday lending, address stability, etc.
All these experiences breathe life into a credit profile that might otherwise be flat or stale. In fact, alternative data are proven to accurately score more than 90% of applicants who previously returned as no-hit or thin-file by traditional credit models.
If I only had one picture of my son, I would still cherish it. But my son has changed tremendously in the last two years, and I can only assume the same will be true of the next two years. I want to capture how happy he is riding his new bike, and I want to remember the year I took him to his first Atlanta Braves baseball game. It’s the combination of the pictures, artwork and personal notes that enhance our memories and show the complete picture of how our family is changing.
Similarly, traditional credit scores are a fine place to start when managing risk. However, it’s when you take a hybrid approach, adding data assets like trended credit and alternative data, that you’re truly able to identify high-risk or high-opportunity customers, and make better-informed decisions about consumers near score cutoffs.
When you only see part of the picture, you don’t get the whole story. With a more complete picture of risk you could open the door to financial freedom for millions of people.