What Is Alternative Credit Scoring?

Alternative credit scoring has become mainstream — and for good reasons. These scoring models could help nearly 50 million consumers who don’t meet the criteria for a traditional credit score and often find themselves excluded from popular financial products.¹

Lenders that use alternative credit scores can find opportunities to expand their lending universe without taking on additional risk and more accurately assess the credit risk of traditionally scoreable consumers. Obtaining a more holistic consumer view can help lenders improve automation and efficiency throughout the customer lifecycle.

What is alternative credit scoring?

Alternative credit scoring models incorporate alternative credit data* that isn’t typically found on consumer credit reports. These scores aren’t necessarily trying to predict alternative outcomes. The goal is the same — to understand the likelihood that a borrower will miss payments in the future. What’s different is the information (and sometimes the analytical techniques) that inform these predictions.

Traditional credit scoring models solely consider information found in consumer credit reports. There’s a lot of information there — Experian’s consumer credit database has data on over 245 million consumers. But although traditional consumer data can be insightful, it doesn’t necessarily give lenders a complete picture of consumers’ creditworthiness.

Alternative credit scores draw from additional data sources, including:

• Alternative financial services: Credit data from alternative financial services (AFS) can tell you about consumers’ experiences with small-dollar installment loans, single-payment loans, point-of-sale financing, auto title loans and rent-to-own agreements.
• Buy Now Pay Later: Buy Now Pay Later (BNPL) borrowing is popular with consumers across the scoring spectrum, and lenders can use access to open BNPL loans to better assess consumers’ current capacity.
• Rental payments: Landlords, property managers, collection companies, rent payment services and consumer-permissioned data can give lenders access to consumers’ rent payment history.
• Full-file public records: Credit reports generally only include bankruptcy records from the previous seven to ten years. However, lenders with access to full-file public records can also learn about consumers’ property deeds, address history, and professional and occupational licenses.

Consumers also now have options for easily and securely sharing access to their banking and brokerage account data — and they’re increasingly comfortable doing so.

Tools like Experian Boost allow consumers to add certain types of positive payment information to their Experian credit reports, including rent, utility and select streaming service payments. Some traditional scores consider these additional data points, and users have seen their FICO Score 8 from Experian boosted by an average of 13 points.²Experian Go also allows credit invisible consumers to establish a credit report with consumer-permissioned alternative data.

Lenders that gain direct access to consumer-permissioned data may be able to use it to power their custom credit scores and decisioning. Along with payment information that they can glean, the transaction-level data can help lenders understand consumers’ income and spending patterns in real-time.

The benefits of using alternative credit data

The primary benefit for lenders is access to new borrowers. Alternative credit scores help lenders accurately score more consumers — identifying creditworthy borrowers who might otherwise be automatically denied because they don’t qualify for traditional credit scores. The increased access to credit may also align with lenders’ financial inclusion goals.

Lenders may additionally benefit from a more precise understanding of consumers who are scoreable. When integrated into a credit decisioning platform, the alternative scores could allow lenders to increase automation (and consumers’ experiences) without taking on more credit risk.

The future of alternative credit scoring

Alternative credit scoring might not be an alternative for much longer, and the future looks bright for lenders who can take advantage of increased access to data, advanced analytics and computing power.

Continued investment in alternative data sources and machine learning could help bring more consumers into the credit system — breaking barriers and decreasing the cost of basic lending products for millions. At the same time, lenders can further customize offers and automate their operations throughout the customer lifecycle.

Partnering with Experian

Small and medium-sized lenders may lack the budget or expertise to unlock the potential of alternative data on their own. Instead, lenders can turn to off-the-shelf alternative models that can offer immediate performance lifts without a heavy IT investment.

Experian’s Lift Premium^TM score uses alternative data. The scoring model’s unique decision tree modeling approach can offer up to a 10 percent lift compared to traditional models — including up to a two percent lift on thick-file consumers. And it can score 96 percent of U.S. adults, which is 15 percent more than traditional scores.³

Third-party score developers, including Experian, can help lenders create and validate custom and specialty models that incorporate alternative credit data and lenders’ internal data sets. And Experian’s thousands of unique credit attributes can help partners spot trends and valuable insights that give them an edge over the competition.

Learn more about our alternative credit data scoring solutions

* When we refer to “Alternative Credit Data,” this refers to the use of alternative data and its appropriate use in consumer credit lending decisions as regulated by the Fair Credit Reporting Act (FCRA). Hence, the term “Expanded FCRA Data” may also apply in this instance and both can be used interchangeably.

¹Oliver Wyman (2022). Financial Inclusion and Access to Credit [White Paper]
²Experian (2023). Experian Boost
³Experian (2023). Experian Lift Premium