Credit Building in the Digital Age

1. Use of Alternative Data

The Innovation
Fintechs like Esusu, a participant in the Financial Solutions Lab Accelerator, have pioneered incorporating data such as payment history for rent, utilities, or telecom bills into the credit reporting system. Analyzing this data has enabled modelers to look beyond what lenders and loan servicers can report and to develop credit scoring algorithms that consider payment history on different types of obligations.

The Opportunity
Consumers can reap the benefits of positive payment history when lenders use credit scoring models or algorithms that take available alternative data into account.

The Risk
If consumers fall behind on rent, utility, or other payments, it could adversely affect their credit profile. This is a particular risk with services that do not depend on consumers’ consent.

2. Increased Options for Building Credit

The Innovation
A number of fintechs, such as Credit Karma and Brigit, are experimenting with how to expand access to products like credit builder installment loans. Others, like Chime and Varo Bank, have developed different types of credit-building payment products that bear a resemblance to secured credit cards, but are designed for consumers who cannot (or prefer not to) put down a security deposit.

The Opportunity
Research to date suggests that credit builder products are particularly likely to benefit those who are credit invisible. In various ways, newer forms of these products also seek to mitigate the risks of negative outcomes for borrowers’ financial health.

The Risk
Data on outcomes for consumers who use these products is very limited, and more research is needed. Some experts have even expressed concern that newer products may give other lenders an inaccurate view of the creditworthiness of the consumers using them.