In the past, credit scoring was very stringent and rigid, both with credit bureaus and lenders referring only to the borrowing history of the individual for ascertaining their creditworthiness. Unfortunately, this did not make applicants with a zero-credit history eligible for loans, and on top of this, they had to pay very high rates of interest, if at all they were fortunate to get their loans approved.
Alternative credit scoring companies – How do they help you out with loans?
Alternative credit scoring companies help you with alternate credit lending. In this way, they can address the above problem by deploying relatable, current, and easily available information about applicants for determining their creditworthiness, for example, their digital footprint.
Thanks to alternate credit scoring, those who cannot enter a credit system get the help they need in the form of simple loans. This means they get the break they need to establish credit scores. At the same time, this process also helps lenders get access to the sections of the under banked population.
With alternate credit scores, they are able to issue credit to the above-targeted group. In this manner, the risks are reduced for alternative lenders, and the interest rates are decreased for borrowers. This interest rate is generally based on their alternate credit scores.
The three tenets of alternate credit scoring
The following are the three tenets of alternate credit scoring-
When factors besides credit scores from loans taken in the past are used, companies deploy the social and digital data of the applicant to determine the three tenets listed above. This means whether they have the ability and the willingness to pay the loan back and whether they are financially stable enough to complete the payment.
In order to place together with the alternative credit score, the companies deploy tools that deploy the following sorts of data with the help of algorithms infused with machine learning and artificial intelligence-
- Payments of utility bills.
- Details of bank accounts.
- Payments of telecom.
- Payments for lease and rent.
The payments of the above services and bills display the ability and intent of the applicant to pay monthly dues with discipline. Often the above portrays the creditworthiness of the person over conventional credit reports in the past would.
This was primarily because the credit ratings of an individual would reflect on traditional reports for two to three years. Experts of alternative credit scoring companies state that the applicant’s financial discipline could have changed for either the better or worse during the above period.
Likewise, someone with a good credit score in the past might be struggling to pay their bills currently. This meant that the person would get approval for credit based on his/her past score. On the other hand, someone without a credit score who intends and is able to pay his/her bills on time will not be able to get the approval of a loan because there is no credit score.