Using alternative data to evaluate creditworthiness

by Brian Kreiswirth and Peter Schoenrock, CFPB

Without credit, it is nearly impossible to buy a home or start a business. People face barriers to accessing credit or have to pay more for credit for several reasons. Some people have negative items, such as a record of late payments, on their credit report. Other people have trouble documenting their income.

Still others have either no credit history or credit history that is too scarce or “thin” to generate a credit score. This issue  affects an estimated 45 million Americans and more often affects African-American, Hispanic, and low-income consumers.

Some lenders and financial technology (“fintech”) companies are looking to use alternative forms of data and newer methods of analyzing that data to assess an applicant’s creditworthiness. These innovations could expand access to credit, especially for people with thin credit histories. But like any innovation, there may be risks and unintended consequences, too.

We’re looking into the promises and pitfalls of these innovations and the steps players in this market are taking to harness the benefits while managing the risks.

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