October 15, 2024
More than 45 Million individuals in the U.S., specifically immigrants and people with limited credit histories, find themselves excluded from mainstream financial services due to insufficient credit records. Known as “credit invisible” or “unscorable,” they face significant barriers when trying to access loans, mortgages, and other financial products.
According to Misha Esipov, CEO of Nova Credit, the U.S. credit system poses a Catch-22 for many newcomers. “Millions of people move to the U.S. every year, and when they arrive, they are invisible,” says Esipov. “You need to have experience with credit to be approved for credit, but only when you have access to credit can you build history”.
This paradox is one of the driving reasons behind the rise of alternative credit solutions.
The role of alternative data in credit scoring
Traditional credit scores rely on a limited, specific set of financial data to assess borrowers’ worthiness. This model excludes those who pay their bills on time and may have built histories in other countries but do not have credit cards or conventional loans in the U.S. Alternative credit data includes a range of non-traditional financial activities such as rent payments, utility bills, and/or mobile phone payment histories. These additional data points allow lenders to see a fuller picture of a consumer’s financial behavior, providing a way to assess creditworthiness more comprehensively.
Esipov points out that the limitations of traditional credit models leave immigrants or people with “thin” credit files underserved within the American financial system. These individuals are often unfairly penalized because the traditional credit system does not capture the full extent of their financial responsibilities or histories.
Building financial inclusion in the United States
One of the most important benefits of alternative data is its potential to foster financial inclusion. For immigrants who arrive with no U.S. credit history, tools like Nova Credit’s “Credit Passport” allow lenders to access their international credit records, helping them to transition more smoothly into the U.S. financial system. Additionally, products like Nova Credit’s “Cash Atlas,” which uses cash flow data from bank accounts, help individuals demonstrate their ability to manage money responsibly, even if they lack traditional credit histories.
For consumers, alternative data can mean the difference between being approved or denied for a credit product. Lenders can use this expanded dataset to assess risk more accurately and offer credit to individuals who may otherwise be overlooked.
A call to action for lenders
Lenders are increasingly recognizing the value of incorporating alternative data into their credit decision-making processes. According to a report by Experian, 62% of financial institutions are now using alternative credit data to improve risk profiling and enhance credit decisioning.
The benefits extend not only to consumers but also to lenders that can expand their pool of eligible borrowers and reduce risk through more accurate credit assessments.
Implementing these changes, however, requires a shift in mindset and operations. “Change management is really hard,” Esipov acknowledges, “Lenders must be willing to invest in new technologies and data sources that enable them to better serve the underserved while maintaining regulatory compliance and managing risk effectively.”
Alternative credit data represents a powerful tool for promoting financial inclusion, enabling immigrants and individuals with limited credit histories to access the credit they need. By embracing these changes and challenges, lenders can not only fulfill their mission of serving underserved communities but also position themselves for long-term growth in an increasingly competitive market.