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By Kevin Pipkins
In today’s current economic environment of rising inflation and layoffs, many
Americans may be stretched thin for cash, affecting their spending
habits and forcing them to seek options for extra capital. It is
common for consumers to request new credit or increases in lines of
credit from their card providers to help curb the loss of employment
or to take on additional expenses.
To help ensure borrowers are not overextending themselves or
taking on more debt than they can handle, lenders should prioritize
leveraging alternative data, such as income and employment
verification, at every stage of the lending life cycle. Using
alternative data sources helps lenders to deter the risk of
delinquency or defaults by consumers on credit card payments by
expanding their view of consumers’ financial health during the
application process. Card issuers that leverage alternative data can
often present better terms and offers at application to card
applicants while protecting themselves from undue risk by helping to
minimize credit-loss rates.
Even in the current uncertain economic times, the average
American must still make purchases for household essentials, food,
and sometimes larger, practical purchases that are needed. To do so,
many consumers will continue to take advantage of credit cards and
alternative financing options like Buy Now, Pay Later. More Americans
are carrying a monthly credit card balance, and The Federal Reserve of
New York noted a 15% increase in
year-over-year credit card balances.
While lenders and card issuers can help ease the financial
pressure of monetary obligations for consumers, they need to do this
while lessening the risk to themselves and the borrower. Utilizing
automated alternative data capabilities can help them more
effectively assess the consumer's financial well-being and better
assist with decisioning for card applications and credit line
Traditionally, when borrowers applied for a new credit card
or requested an increase in their line of credit, they were asked to
jump through hoops to meet requirements. The card issuer would
assign a credit limit that could be based on multiple factors
including credit score, credit history, income, and existing debt.
Before the recent technology boom, such a request would be processed
over the phone or at a branch, often requiring borrowers to provide
their own documentation as proof of their creditworthiness.
This way of doing business left card issuers open to risk,
with some borrowers providing over- or understated income or phony
employment information or the some card issuers’ staff’s errors
resulting in mistakes in the underwriting process. Now, cardholders
can apply for new credit or request a line of credit increase
conveniently from their phone with the same immediacy as an online purchase.
Automated income and employment data help provide employment
history insights in the currently volatile economy. The job market is
changing, and lenders need an up-to-date view of consumers’ financial
stability to make the best lending decisions possible.
Credit applications and line increase requests usually
require consumers to update income and employment information. Once
approved, it could take several weeks before the line of credit
appears. Income and employment verification data can help throughout
the entire credit life cycle: starting with the application process
and approval, during portfolio review and account management, and
even into the recovery strategy.
Applicants with higher credit-risk profiles are potentially
likely to sustain losses more than those with lower credit-risk
profiles. Lenders utilizing income and employment information from
The Work Number® can feel more confident about loan affordability,
even for applicants with less-than-prime credit scores. The Work
Number database has coverage across many VantageScores. Nine percent
of Consumers with records on The Work Number database have no credit
file with Equifax, 5% have a non-scorable credit file with Equifax,
49% have a VantageScore® between 580 and 679, and 37% have a
VantageScore of 680+. Employment and income data can help in loan
decisioning when used in conjunction with a traditional credit score.
As we navigate 2023, lenders should ensure they are
leveraging alternative forms of data, such as income and employment
data from The Work Number from Equifax. Information beyond
traditional credit scores can help with application decisions. With
alternative data, Equifax is here to help card issuers and lenders
identify those applicants who would be strong users of their services.