28-Oct-2017 written by : FSI-Team
Today, a large number of credit rating agencies have started to become more inclusive with regard to the credit scoring models used by them.
In other words, they have started including new data sources such as mobile wallets, utility bill payments, rent payments, etc. in their credit score calculation models. This will change the traditional model that only focused on home loans, personal loans, credit card payments, and other traditional forms of credit.
The following are some of the primary reasons why the credit rating agencies felt the need for adopting an alternative credit scoring model:
The problem with the current credit scoring model is that it leaves out a large portion of the population. In fact, when the American Consumer Financial Protection Bureau conducted a study in 2015, it found that a whopping 26 million Americans don't come under any credit bureau. However, this kind of situation can be easily expected from other countries too, including India.
The reason why so many people are not covered by credit rating agencies is that these people come from financially weak backgrounds. So, they don’t use credit cards, take loans, earn a fixed income, or even have sizeable assets. However, this doesn’t automatically make them bad candidates for lending purposes.
Credit bureaus all across the world have been continually trying to make their credit scoring models more accurate so that banks can bring down the instances of bad loans or non-performing assets.
To get the most accurate credit scores, the agencies mainly use the following two factors:
While the two main factors discussed above are good enough to help assess the creditworthiness of a person to a certain level, they have proved to be imperfect. This is because cases of defaults still continue to increase. Thus, it led to the need for a more accurate scoring model.
With additional factors like social media activities of an individual, their online shopping trends, payment of taxes, etc. a credit bureau can calculate a CIBIL score or credit score that's more accurate and so help the lenders make better decisions.
Alternative credit scoring models are here to stay and a large number of existing as well as new rating firms have already started incorporating the same into their systems. In fact, even traditional banks on their end have started using alternative sources of data to reach out to the new customers and push additional/premium products to the current ones.
As the new and more "inclusive" credit scoring model is becoming the norm, it's natural that no agency wants to be left out.
As a borrower, you don't have to worry for now. The alternative scoring model is still new and fresh. Most of the rating agencies and banks are using it for experimentation and informational purposes. So, if you want to stay prepared for home loans, car loans, etc. with a good credit score, you can stick to the rules that apply to the traditional scoring model, which are: