Equifax compares approving credit without reports and scores to “building a puzzle with missing pieces,” underscoring the necessity of these tools for informed lending decisions.
But how exactly do they benefit the entire lending ecosystem? Here’s how.
Consumer credit reports serve as invaluable tools for lenders and brokers, providing deep insights into an applicant’s credit history and financial behaviors.
“Credit reports can assist with understanding how your applicant has historically managed credit, including their previous applications, the type of credit applied for and with which lenders,” Equifax said, detailing the importance of these reports in assessing credit risk.
They offer not just a snapshot of past and current financial actions but also include a credit score, which predicts the likelihood of future payment issues.
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Access to comprehensive and accurate credit data allows lenders to make informed decisions at every stage of the credit lifecycle – from pre-screening efforts to collections. The inclusion of buy-now-pay-later (BNPL) data and the use of advanced machine learning techniques enhance the predictive power of credit scores, providing a richer, more detailed understanding of an applicant's financial situation.
With detailed credit reports, lenders can effectively segment borrowers according to their risk profiles. This segmentation facilitates risk-based pricing and the customisation of loan offerings, appealing to a broader range of borrowers while optimizing pricing strategies to manage risk effectively.
Credit reports and scores enable quicker loan approval processes by providing a clear picture of an applicant’s creditworthiness. This rapid assessment helps lenders focus their efforts on viable candidates, thereby increasing operational efficiency and profitability.
“A reduced time to ‘yes’ can accelerate sales and maximise profitability,” Equifax said.
The integration of Comprehensive Credit Reporting (CCR) data into credit reports helps lenders maintain compliance with regulatory standards and make more responsible lending decisions. This data not only offers a more precise look at a borrower’s financial health but also aids in the early identification of potential financial distress, ensuring that lenders can act responsibly in their lending practices.
Incorporating non-traditional data sources like BNPL into credit assessments allows lenders to evaluate “marginal” applications more effectively. This approach not only improves financial inclusion by providing credit to those with limited credit histories but also minimises risks associated with expanded credit access.
The use of explainable artificial intelligence in credit scoring further enhances transparency, helping borrowers understand how their financial behaviors influence their credit scores and loan terms, Equifax said.
Visit Equifax’s Knowledge Hub for the complete article.
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