By Thomas C. Brown

To achieve growth, lenders must always be on the lookout for new, creditworthy customers, but this process has become increasingly difficult in a competitive market with an oversaturated customer base.

Make no mistake — the pool of potential borrowers is shrinking. There is an urgent need to consider emerging, nontraditional technologies to facilitate growth.

More than 75% of Americans have credit cards, with the average cardholder carrying nine. Nearly half of cardholders maintain a balance on their accounts and usually carry even larger debt loads for their cars, homes, and education.

In addition, most consumers receive up to 30 credit card solicitations annually. Students are becoming cardholders at an early age — 83% of undergraduates have at least one card, with 32% having four or more. By the time they graduate, tomorrow’s buyers will have tripled the number of cards in their wallets and doubled their average card balance.

The median number of bank cards per person is two, and the median credit limit is $13,500. Total household debt, including mortgage, now reaches nearly 100% of most consumers’ post-tax annual income. With credit debt at this level, where is the room for growth? Where can lenders look to find new sources of revenue and cultivate borrowers?

Lenders must shift their focus to the 25% of people who have traditionally relied on cash. This group includes immigrants, young people new to credit, and those with a cultural bias against credit. This is where the growth potential lies.

These markets offer a vast sea of untapped, creditworthy individuals whose “thin” history makes it difficult for them to obtain credit. The challenge for lenders becomes how to tap this revenue source with fiscal assurance.

Traditionally, banks and credit card companies have been forced to rely on evaluations of a consumer’s credit history, usually proffered by one of the major reporting agencies. This method determines creditworthiness by looking at such factors as whether bills are paid on time, the debt carried, the amount of credit available, the debt-to-income ratio, etc.

But in today’s competitive climate, this method falls short. Not every consumer has a robust credit history, and some histories do not reflect true creditworthiness, because they do not take into consideration, for example, life-changing circumstances.

To supplement traditional credit-scoring methods, lenders should consider technology to target applicants who may have been rejected by previous scoring methods.

Nontraditional credit scoring relies on a detailed analysis of positive and derogatory life events, evidence of assets and address stability, positive identity verification, and public records like employment and marital histories.

These noncredit sources record information that is analogous to a traditional credit history, providing relevant insight about an individual’s economic lifestyle. This approach can help lenders predict future behavior and identify new borrowers. For an applicant with a thin credit history, stable addresses with phone listings are evidence of responsible housing and utility payments. Credit bureaus typically do not record such payments, but nontraditional data sources do.

Consider the wireless phone industry, which uses traditional credit scoring yet experiences higher-than-usual delinquencies and risk. Of 100,000 new telecom customers who were followed for 18 months, 19% were delinquent. The losses incurred in this industry can be substantially reduced if poor-risk customers — those scoring low by nontraditional scoring methods — are required to make an up-front deposit.

Traditional scoring methods rely exclusively on past credit management. This approach significantly limits lenders’ growth potential. The alternative — using nontraditional data instead of credit history — will enable creditors to capitalize on the expansive market of nontraditional credit seekers.

There is room for growth in this market, with the use of out-of-the-box thinking and modern scoring technologies.

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