Consider nontraditional loans to gauge creditworthiness

Traditional data is currency when it comes to a credit score — who you are, what you do for a living, how much you make and what debts you've paid off.

But as research reveals more ways that small pieces of information can increase a borrower's creditworthiness, what the industry considers relevant compared with what's "alternative" may change.

Alternative data points, which can include real estate, tax and deed records, debit and checking account information, are not reflected in traditional credit files, but they could be valuable predictors of a borrower's actual credit risk.

For example, a TransUnion study released last week said consumers who successfully pay back multiple short-term loans can actually be a safer credit risk than those with only one or two short-term loans.

And, borrowers who take out short-term loans — in increments as low as $200 or $300 — multiple times a year and make payments on time may perform as well as borrowers paying off a traditional loan that adds up to about the same amount, says Matt Komos, vice president of research and consulting at TransUnion.

The only difference is, "The [short-term loan] borrower is not getting the credit for it, so to speak," he said.

Lenders should reference alternative loan data when deciding whether to approve an applicant. Doing so could help borrowers move up the totem pole, even though they may not have been deemed creditworthy otherwise.

TransUnion has tracked the efficacy of alternative data in determining creditworthiness for more than a decade.

In 2016, a survey of auto and mortgage lenders and credit card companies found that 83 percent of lenders using alternative data to score applicants said they have seen "tangible benefits." And about two-thirds of those respondents said alternative data had helped them reach more creditworthy consumers.

Giving these consumers credit for paying on time should be considered alongside more traditional sources. Factoring in additional data points could give borrowers a boost, making them eligible for more opportunities to build their credit and lifting them to a stronger bracket.

You can reach Jackie Charniga at jcharniga@crain.com -- Follow Jackie on Twitter: @jccharniga

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