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Can Alternative Data Help You Get Credit?

When applying for credit, we know that we are likely to be subjected to the traditional credit search, where the potential creditor will check our credit history through one of the three main credit reporting agencies, Trans Union, Equifax and Experian.  However, for those who do not have an established credit history, there may be a road block to getting credit.  Can the use of "alternative data" help those with un-established credit histories have a better chance in the marketplace?

How Your Credit Score Is Calculated Now

Your credit report is a compilation of your personal and financial information.  Credit reporting agencies collect information and create credit reports based on the information and lenders use the reports along with other details to determine your credit worthiness.  The information included in your report is then used to calculate your credit score.  Lenders also use your score to determine if you are eligible for credit and at what interest rate.  Currently, alternative or non traditional data, (such as information such as your length of time employed, your residence, spending habits and activity on social media) is not included or considered in your report.  However, that may be about to change as there is talk about whether considering this data will help or harm consumers.

How Alternative Data Could Increase Your Credit

On a positive note, experts are looking into whether or not the use of "alternative data" could allow a greater number of consumers to have access to credit.  Many consumer minded groups feel that including alternative data will allow consumers with poor credit history or no credit history to finally have enough information for lenders to consider them.  Essentially, non traditional information will allow these consumers to have enough information to compile a credit score and aid consumers with a low credit score and unfavorable interest rates to improve their score and pay more favorable terms.

Issues of Accuracy

Proponents of using alternative data argue that in light of the involvement of the internet and social media in every day life, including this information only makes sense.  However, opponents argue that including this data creates a gray area in terms of the accuracy of this information.  The Fair Credit Reporting Act (“FCRA”), the federal statute that protects consumer rights in the credit reporting industry, was enacted to ensure accuracy in reporting and dissemination of consumer information.  If alternative data was used in consumer reports the credit reporting industry would face difficulty ensuring the accuracy of the information and conducting the dispute process would pose numerous challenges. 

Issues of Data Gathering and Verification

Additionally, if alternative data was used in consumer reports there is much confusion about how the information would be gathered, stored, reported and verified.  For example, if the number of times a consumer moved homes and/or the length of time a consumer remained at each residence was used to help determine a credit score, who would provide this information and how could the information be verified when its accuracy was disputed by a consumer.  

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While using alternative data could allow millions of people who are currently considered “uncreditworthy” consumers to have access to credit, figuring out how to compile the information and utilizing it will certainly be a work in progress.  If you believe your rights have been violated under the Fair Credit Reporting Act and you would like the advice or assistance of counsel, contact SmithMarco P.C. for a completely free case review.

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