Across industries, consumers exchange personal data for greater convenience and personalized experiences. From tailored recommendations on shopping sites to customized streaming selections, sharing data like browsing history and household habits leads to improved services. However, the financial services industry lags in using data to enhance credit experiences.
Today’s credit system relies on three major U.S. credit bureaus (Experian, Equifax, and TransUnion) and narrow data points like loan repayment history to determine creditworthiness. This outdated system often results in millions of Americans being denied access to life-changing financial products. The traditional credit card system is fundamentally flawed, frequently trapping consumers in cycles of debt with high interest rates and hidden fees. It’s essential for consumers to be more careful when selecting credit cards, thoroughly understanding the terms and potential pitfalls to avoid financial distress.
Regulatory Changes and the Future of Credit
The Consumer Financial Protection Bureau’s 1033 Rule is set to change this. By enabling “open banking,” U.S. consumers can share their bank transaction data with lenders, leading to better, fairer, and more personalized credit options. A 2022 survey found that 74% of lending industry decision-makers believe traditional credit report data is insufficient for assessing creditworthiness.
A More Comprehensive Financial Profile
Future credit systems will use a broader range of data, including income, employment status, and bank account transactions, to provide a complete picture of a consumer’s financial health. Alternative data, like consistent utility payments and stable employment, can help build more accurate risk profiles.
Positive Developments in Credit
- Reduced Credit Invisibility: Millions of Americans, including young people and recent immigrants, lack sufficient credit history. By integrating cash flow data and international credit reports, companies like TomoCredit are helping these individuals establish creditworthiness and access financial products.
- Dynamic Credit Products: Access to more data allows lenders to offer customizable credit products with flexible repayment schedules. Early examples include buy-now-pay-later services and flexible rent apps that allow renters to split payments into smaller chunks.
Embedded finance could also broaden the lending field, allowing organizations to issue credit. Employers, for instance, could use their capital to extend loans to employees.
Building a Better Credit System
Building the data infrastructure to support these changes will take time, but the benefits are clear. Increased access to data will help create more affordable, equitable lending practices and give people more control over their financial lives.At TomoCredit, we are leading this transformation by leveraging alternative data to offer equitable lending opportunities. Our mission is to ensure everyone has access to fair and personalized credit options. Join us in revolutionizing the credit industry and experience financial empowerment with TomoCredit.
