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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 increase requests.
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.