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American Consumers Continue Battle With Inaccurate Credit Scoring Methods Finds Pinwheel

New data from the American payroll data connectivity platform Pinwheel indicates the dire need for innovation within credit scoring and lending due to the ongoing miscategorisation of borrowers. 

The latest consumer survey by Pinwheel has brought to light how US lenders are wrongly identifying borrowers through outdated and inapplicable credit scoring methods.

It also uncovers a willingness among consumers to share the relevant data if it were to conjure more relevant products and services.

Key findings

One of the survey’s key findings was that 56 per cent agree that credit scoring methods are not transparent.

Considering the importance of the credit score in the credit-decision process, a lack of awareness of how it’s calculated indicates consumers are excluded from a system that exerts a significant influence on their financial health. Consumers lack faith in the transparency and fairness of credit scoring.

Because of this, consumers are losing out on lending opportunities by not being evaluated based on their income. In this light, 53 per cent agree that current credit ratings are not fair, and three-quarters believe that a credit score shouldn’t be the only criteria for getting a loan.

Three-quarters of working Americans report that external factors have impacted their credit score. These factors include insufficient credit history, missing repayments, and applying for multiple loans or credit cards within a short period of time.

Those with an income of less than $30,000 are more likely to have an impact on their credit score due to having little credit history/too few credit cards.

Insufficient credit history and having too few cards are impacting credit scores for 19 per cent of working Americans.

This is leading to many feeling excluded from certain loans having been disproportionately impacted by outdated lending/credit evaluation practices. Of the respondents, 42 per cent don’t feel included in the current credit rating system.

These results signal a clear message to financial institutions that credit scoring and lending are in dire need of innovation.

Consumers want to connect their true financial status with lenders. But according to Pinwheel’s findings, the current credit scoring is not accomplishing this.

Credit decisioning with better data

Pinwheel’s findings encourage financial institutions to explore the inclusion of alternative data in determining creditworthiness

Failure to adapt will cost institutions both their customers and their profits. Naysayers will ultimately lose out to modern, inclusive lending practices.

The data points to the wider inclusion of consumers’ income as a solution to this. Having ongoing real-time access to income data will enable lenders to lower risk. It will also allow them to proactively respond to changes in the borrower’s income and offer more personalised financial services.

Nearly half are willing to share access to their financial data if their financial standing was to be better reflected. Many remain interested in its ability to cultivate more personal financial products. Despite this, 42 per cent say they have limited control over their personal financial data.

Author

  • Tyler is a fintech journalist with specific interests in online banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

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