Lending in the US saw a turning point in 1956 when Fair Isaac Corporation (FICO) introduced the primary framework of what is now known as the FICO score. The FICO model is used by 90% of lenders in the country for credit risk management. It has also helped fairly evaluate the credit profiles of more than 190 million Americans, further empowering financial inclusion in the US.

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However, the predicament with FICO scores is that it can only be received by individuals with a credit report with at least one account opened for six months or more, an account that has been reported to a credit bureau within the past six months, and no indication of deceased, if two people share an account. So what happens to those who don't have a credit report?

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Recent data from FICO shows that about 53 million Americans do not have traditional credit bureau scores. They mainly consist of young adults just beginning their credit journey, Black and Hispanic adults, and immigrants, including those who have built credit scores in the country they previously resided in. In addition, credit scores differ in each country due to varying data protection laws. Thus, immigrants would have to start over again should they generate a credit score in the US. 

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Without a credit report, these individuals won't have a chance to build their credit scores. In turn, they'll have little to no access to credit or loans that they may need to fulfil large-scale investments. Because of these limitations, FICO has taken advantage of alternative data to financially include individuals with thin credit files or no credit files at all.

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The role of alternative data in credit scoring

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Many finance experts believe that alternative data can significantly help "credit invisibles" finally obtain credit scores. As pointed out by Grovetta Gardineer, the Office of the Comptroller of the Currency's senior deputy comptroller for bank supervision policy, "credit invisible" individuals may be hardworking, responsible people who regularly pay their bills on time and may be eligible to get a credit bureau score.

Now with alternative data, lenders can evaluate borrowers based on their history of rent, utilities and phone plan payments, and their general management of deposit account cash balances.

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FICO launched FICO Score XD in 2016 to help credit invisible individuals generate a traditional FICO score by using alternative data. The solution takes payment data from TV or cable, utilities, phones, and landlines and uses the same credit score range as the traditional FICO score, 300 to 850.

In 2018, FICO released FICO Score XD 2 to leverage alternative data sources further, increasing credit access and helping lenders better assess unscorable consumers. As a result, it has scored more than 26.5 million previously unscorable consumer files―clearly significant progress to complement the traditional FICO score.

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With the proliferation of financial technology today, alternative credit scoring solutions have also been instrumental in generating real-time credit scores, streamlining the entire process for both lenders and borrowers. Financial institutions can speed up credit processing times through artificial intelligence and machine learning, personalize products and services, check customer behaviour in real-time, and meet regulatory requirements.

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In this day and age, financial institutions can even use anonymous smartphone metadata―data without personal identifiers―to monitor the daily mobile usage of borrowers and predict their behaviour and intention to pay back loans or credit. Data anonymity is an important aspect of this new credit scoring method, especially since data privacy is a top concern among financial institutions and customers.

Using multiple data sets for better credit risk assessment

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For lenders that employ alternative credit scoring solutions, using multiple data sets can help them better assess unscorable individuals. In addition, they can adopt technologies from other fintech companies today, including credolab. Through its array of credit scoring apps and algorithms, lenders and other financial institutions can improve and streamline traditional credit scoring methods and assess unscorable individuals who are worthy of credit.

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While FICO Score XD collects public records and a person's history with phone, cable, and utility payments to generate scores, credolab looks at smartphone data without personal identifiers to provide borrowers more opportunities to get a credit score. According to our privacy policy, we look at SMS message history, contacts, calendars, list and storage of applications on mobile phones and device hardware type, operating system, language, keystroke patterns and similar information on web devices.

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Credolab produces different data sets as FICO Score XD, but combining the two can better aid lenders in reviewing credit or loan applications. You know what they say: the more, the merrier. As lenders use more sources of alternative data, previously unscorable individuals will have the opportunity to generate a credit bureau score and gain access to many credit opportunities. In addition, especially in this digital age, lenders may generate digital credit bureau scores for borrowers using the multitude of fintech solutions available in the market today. 

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With these fintech solutions today and more, financial institutions can finally speed up credit processing times, boost customer satisfaction with personalized offerings, analyze customer behaviour in real-time, and meet regulatory requirements. As a result, credit invisible can finally be one step closer to being financially included. 

Americans are in a better place now when it comes to credit opportunities compared to two to three decades ago. Fintech has been able to bank the unbanked in more ways than one, and it certainly wouldn't come as a surprise if the US financially includes all of its citizens with the help of more innovative fintech solutions in the future.