Unfortunately, each consumer credit reporting agency calculates credit scores differently, making it difficult for lenders to calculate true creditworthiness based on credit score alone. Credit scores may not include recent transactions or may be based on inaccurate data, such as a loan from someone with a similar name. Each credit reporting agency is treating new types of loans, like BNPL, differently, making it even hard to assess creditworthiness purely from one data source.
Repayment history
Repayment history refers to payments made for past debt, including if payments were on time. Most lenders report payment history to credit agencies which use them to calculate credit scores.
Using repayment history essentially requires consumers to take on debt before they can be considered creditworthy. As a result, consumers without a repayment history may not be able to access credit at all. This requirement is changing, however. For example, SoLo, a peer-to-peer lending platform, considers repayment history within the app to determine creditworthiness.
Collateral
In relation to creditworthiness, collateral refers to assets a lender can seize if a consumer fails to honor the terms of a loan. For example, if a lender finances a car loan, they can seize and sell the car to cover losses if the consumer fails to pay. This data can be used to determine creditworthiness for larger purchases, such as a car or home, or for business loans.
However, relying on this lending data can limit access to consumers who don't qualify to purchase a home or car.
Credit utilization
Credit utilization is the sum of all a consumer's debt divided by the sum of their credit card limits. Essentially, this number tells lenders if you have maxed out your current credit lines by measuring your unused credit.
Consumers who don’t utilize the full lines of credit across many cards may be more likely to repay their loans. However, using this metric puts consumers who don't have credit cards at a disadvantage and incentivizes opening multiple lines of credit.
Alternative sources of creditworthiness data
Creditworthiness is always based on data, however, many lenders rely solely on the most accessible sources of financial data, such as credit scores and credit reports. However, nearly a third of Americans have a FICO score of fair or below and, as a result, may have less access to credit.
