How Incorporating Non-Traditional Data Into Credit Risk Decisioning Can Drive Growth

Ma-Keba Frye  |  August 17, 2020   |  Credit & Lending  


The widespread impact of the COVID-19 pandemic and economic fallout has presented banks and lenders with an unprecedented challenge: unreliable credit risk decisioning. The crisis triggered a domino effect as lockdowns led to massive unemployment, which damaged consumers’ abilities to pay their bills. 

As a result, the banking and lending industry must explore additional data points to assess credit risk. With traditional credit history data becoming unreliable, non-traditional data is emerging as the key to navigating business recovery and identifying borrowers that are still creditworthy. 

Relying solely on traditional credit risk models can be risky

As the economic downturn continues and unemployment numbers reach record highs, traditional credit risk models are providing less visibility into consumers’ creditworthiness. Government-backed relief programs offering forbearance and deferrals, like the CARES Act, have produced credit blindspots that make it more challenging to determine which consumers are risky and which aren’t. 

With more than 100 million accounts in forbearance and deferred debt payment programs, lenders can’t accurately assess borrowers’ ability to pay.

For financial institutions to mitigate risk while continuing to extend credit to new customers, deeper and expanded visibility into risk profiles will be necessary. With more than 100 million accounts in forbearance and deferred debt payment programs, some lenders have resorted to increasing minimum score requirements and reducing credit offers to new clients. Thus, in the current climate, lenders need a better way to assess borrowers’ ability to pay.


Learn How to Build a Risk Model with Utility Payment Data


Demand for credit is declining

In addition to unreliable credit risk decisioning, credit inquiries have dropped since the onset of the pandemic, indicating that consumer demand for credit is declining. Compared to hard inquiry volume data from 2013 to 2019, new credit card, mortgage, and auto loan inquiries fell by 40 percent, 27 percent, and 52 percent respectively between the first and last week of March. For consumers with higher credit scores, the decline in credit demand was even more significant. 

Several factors could be contributing to this decline, such as a drop in credit supply, consumers’ expectations of being denied credit, and the restrictions placed by the economy and lockdown requirements. Either way, the decline in potential borrowers and the inability to accurately determine their creditworthiness pose a roadblock for banks and lenders. With fewer customers and increased lending risk, there’s little opportunity for growth in the industry.

The pool of prime borrowers may be shrinking

As of June 2020, 44 million Americans have been left unemployed by the pandemic. When businesses began to reopen, some Americans returned to work, however employment recovery has been slow, and layoffs are mounting. Additionally, the $600 CARES Act unemployment benefits, eviction, and utility shutoff moratoriums across the country ended in July, leaving the unemployed to face an even more difficult financial burden.

Like any major financial crisis, the outcomes will be devastating and long-lasting for consumers. The loss of both income and unemployment insurance will lead to missed payments on car loans, rent, and credit cards – causing significant damage to credit scores that will take time and patience to repair. 

Alternative data improves the precision of credit risk decisioning

Alternative data, including rent and utility payments, can provide an additional source of information to better establish a consumer’s creditworthiness and ability to pay. According to a preliminary study conducted by Equifax, utility payment data can improve the ability to identify consumer accounts that face the potential for delinquency within 24 months. 

Utility payment data can improve the ability to identify consumer accounts that face the potential for delinquency within 24 months. 

Sixty-four percent of consumers also believe that the current credit rating system does not give lenders a complete picture of their creditworthiness and are willing to share personal account payment history. 54 percent are willing to share rental payment information and 65 percent are willing to share payment information for utilities and cellphones. 

By incorporating non-traditional utility payment data into credit risk decisioning, banks and lenders can make more informed lending decisions and continue to serve new customers, even during these turbulent times. 

Interested in learning more about what utility payment data can do for your business? Speak with one of our experts today.


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About Ma-Keba Frye

Ma-Keba Frye is a Content Marketing Associate at Urjanet, assisting with content development and execution. When she's not writing, she enjoys reading, listening to music, and volunteering.

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