In Canada, it is estimated there are over 3 million consumers who do not have a robust enough credit history to score with traditional credit scores. These underserved Canadians can pose both risks as well as opportunities for lenders. New-to-credit consumers could be considered risky due to their limited credit history, which makes it tough for lenders to accurately assess their payment behaviours. However, the same consumers can also provide an opportunity for lenders to win them as lifelong customers of multiple products.
Alternative data can provide new insights on this population to help lenders to better analyze their creditworthiness and assess their ability to pay back debt, potentially minimizing risk and increasing opportunities for lenders.
What Does Scoring with Alternative Data Sources Mean?
Credit scores are generated using credit file characteristics such as missed payments, utilization and balances, inquiries, public records, and the ages and types of credit products, to assess the risk of a consumer missing payments and their ability to repay debts.
For files with limited credit information and for applicants without credit files, both aggregated and alternative consumer level data can be used to augment the limited information available for assessing credit risk.
These alternative data sources include;
Neighbourhood street level data
Older trades and inquiries no longer on the credit files
Telecommunications data trades
Scoring with alternative data sources can have meaningful
predictive and economic value to lenders extending credit to
individuals with thin or no traditional credit histories. This type of
scoring can be generated for most individuals who lack traditional
credit scores, and who lenders would otherwise have very little
information on which to base their credit decisions.
Who Does Alternative Data-Sourced Scores Impact?
One of the assumptions around new-to-credit applicants is
that their incomes are in the low to moderate range and that
consumers without credit experience or activity post a high risk of
default. However, this may not always be the case. In fact, the
new-to-credit population is a diverse group that comprises many
segments, including many individuals who would be classified as
prime or near-prime in terms of creditworthiness. Those without
traditional credit scores may include immigrants, as well as
younger, older, and recently divorced consumers. Lenders can
identify lower-risk consumers who don’t receive traditional credit
scores by incorporating alternative data into a responsible credit
What Opportunities does Alternative Data Scoring Provide for Lenders?
For many new-to-Canada and new-to-credit consumers, the first step on the credit journey is applying for a cell phone. It may be some time before these consumers branch into more traditional credit products such as credit cards or loans. Augmenting the limited credit file information of these consumers with data from their telecommunications may provide enough data to create a predictive credit score.
Financial inclusion is crucial in a country that welcomes so
many new people each year. Utilizing alternative data can help
create a more complete view of a consumer can result in an
increased percentage of scored files – more opportunities, more
approvals and more business.
We want to help Canadians live their financial best. If you want to learn more about how understanding consumer credit trends can help inform lending decisions, please contact your Equifax Account Representative. You can also reach us directly at 1-855-233-9226 and follow us on Twitter and LinkedIn.
This article is published by Equifax Canada Co.® 2023. All rights reserved. No part of this article may be reproduced, copied or transmitted in any form or by any means, or stored in a retrieval system of any nature, without the prior permission of Equifax Canada Co. This article is for informational purposes only and is not intended to be legal or business advice.
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