Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.
Table of ContentsSince the 1950s, credit scores have been the gold standard for lenders. However, credit scores alone don’t paint the full picture of a loan applicant’s finances because they don't consider factors like income or spending habits. As a result, both consumers and lenders are missing out.
Incorporating alternative credit data, such as on-time rental payments and monthly utility payments, can reveal a more holistic picture of a borrower’s finances. This “alternative data” to traditional credit scores can increase access to loans at a lower interest rate. It can also expand credit access to those who lack the financial history and increase lenders' customer base.
In this article, we’ll examine how alternative credit data is used, the different types available, and the business and social opportunities it creates.
Alternative credit data is financial information not typically reported to the three main credit reporting agencies (Transunion, Equifax, and Experian) that lenders can use when making decisions about whether to extend credit or offer a loan. For most loan applications, lenders rely heavily on data from these agencies—delivered in a convenient credit score and credit report format.
Alternative credit includes information like rent payment history, gig economy income, utility bill payments, childcare payments, and more. Alternative credit scoring can increase loan approval rates, as credit reports fail to paint the full picture of a borrower’s creditworthiness.
For example, a lender might be unlikely to approve an applicant based on a credit score of 600 alone. However, proof of income sources and a long history of on-time rental payments—good indicators of repayment likelihood—could potentially change that decision in the borrower’s favor.
Alternative data also comes into play with credit invisibles, or people lacking a credit report or credit score. For these individuals, alternative data might be the only way to gain access to loans.
To use alternative data, lenders must first obtain it, and then add it to their loan-approval decision process. For the former, they can ask applicants to manually upload documents such as bank statements and pay stubs or use Plaid’s lending products to gain access to this information in seconds.
They can also choose how much weight they want to give alternative credit data vs. traditional credit report data—or even if they only want to rely on alternative data alone.
→ Want to verify assets and account ownership faster? Plaid’s asset verification APIs instantly provide an up-to-date view of a borrower’s bank accounts and assets.
Alternative lending refers to the practice of providing loans and credit outside of the traditional banking system. It emerged in response to the often strict application process at traditional banks, which limited credit access to people and businesses that don't meet traditional credit requirements.
Alternative lending might refer to fintech companies like Money Lion, which offers consumers loans of up to $500 with no interest, fintech mortgage providers that consider alternative credit data, or peer-to-peer lending platforms. Fintech companies like Prosper connect borrowers and lenders, increasing consumer access to credit without interacting with traditional banks.
Alternative lending is becoming a crucial part of the overall financial ecosystem by allowing underserved consumers to access small lines of credit, reducing their reliance on high-interest loans, and building financial wealth for the long term.
Learn more about how Plaid powers alternative lending with cash flow underwriting by watching the video below.
There are many types of financial data lenders can use to evaluate borrowers outside of the traditional credit report. These include:
Spending patterns: Account information pulled from consumer bank and credit card accounts that shows money going in and out. Lenders can use this data to evaluate income and spending and determine if an applicant is eligible for a loan.
Bill payments: Regular bill payments for everyday life such as rent, utilities, phone, and insurance can be used to show that a loan applicant has a history of paying their bills on time—and can thus be considered creditworthy.
Rental payments: Rental history showing on-time payments over an extended period is a great way for borrowers to demonstrate their ability to pay off a loan. Rental payment data can be accessed either through property management companies or bank account transactions.
Alternative loan types: Some alternative loan types, such as buy now pay later (BNPL) loans and paycheck advances can count towards creditworthiness—though they’re not always accounted for in traditional credit scoring. Consistent repayment on these loans is another data point lenders can use to assess applicants.
Bank account assets: Historic, current, and pending bank account balances can help underwriters gain a more complete picture of a borrower’s finances. Lenders can ask borrowers to provide bank statements or link their bank accounts via an API-based data solutions provider. Plaid, for example, provides access to all the account information the lender needs in seconds.
Income data: Documents and bank inflows that show proof of income, such as pay stubs, 1099s, and W2s, are often used by lenders to determine a borrower’s creditworthiness. Just like bank statements, lenders can request loan applicants to manually upload these documents or use digital solutions like Plaid to directly connect with payroll providers and banks to retrieve this information in seconds.