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The Role of Alternative Data and AI in Determining Creditworthiness

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Creditworthiness has a lot of baggage in the financial world. As a gauge of how likely you’ll pay your debts on time, it represents a lender’s willingness to give you a cash advance, installment loan, or line of credit.

So, what makes a person creditworthy? Traditionally, you’d find the answer in your credit file. Many of the biggest banks still use credit scores and credit reports to assess creditworthiness today.

But nowadays, the way lenders assess risk and assign creditworthiness is changing. New FinTech services rely on alternative data and Artificial Intelligence to revolutionize the underwriting process so that they’re making data-driven decisions that go beyond credit scores.

This may sound complicated, but to the average borrower, it can be a welcome change. It means you can fill out an application to borrow money fast online direct from a financial institution’s website, even if you have bad credit.

What Traditional Factors Affect Your Creditworthiness?

When a lender checks your creditworthiness, they’re looking for indicators that you can reasonably afford their loan under the terms. They do this primarily by running a credit check to see your past borrowing history.

Your credit report details your current loans and lines of credit. It also contains information from any account you’ve closed in the past seven to ten years.

A look at this report will show your credit utilization and payment history habits. Broadly speaking, a record of paying bills on time and keeping low balances on revolving accounts (like credit cards and lines of credit) reflect well on your future borrowing abilities. A record like this generally translates into a high credit score, making it easier to qualify for loans at lower rates.

In addition to this check, lenders may also verify your income and debt loads to understand your cash flow. On paper, a higher income to debt ratio puts you in a better position to repay what you owe.

Why Are Credit-Based Loans Problematic?

Only checking credit may be unfair considering how long it can take to build good credit in your file, and how long bad credit takes to fall of an otherwise flawless record. Under the current scoring models, a mistake from seven years ago can still stand in the way of getting an installment loan — even if you’re currently exhibiting creditworthy behavior.

Although credit scores have never been higher, plenty of people live with bad credit. According to credit reporting agency Experian, 16% of Americans have very bad credit. Another 18% have fair, which still falls under the agency’s subprime category.

Then there’s another 10% of the country who make up the “credit invisible.” These people either have no score whatsoever, or their credit report doesn’t have enough info in it for lenders to make a reasonable assumption of creditworthiness.

With subprime or invisible credit borrowers totaling millions of people, a large number of people have limited access to help in emergencies. Thin, invisible, or bad — this kind of credit doesn’t make borrowing impossible, but it does make it harder when the biggest banks look for prime borrowers.

How is FinTech Changing Things?

Some financial institutions and FinTech services recognize many people are overlooked by traditional measures of creditworthiness. To increase access to cash advances and installment loans to a wider audience, they’ve started to assess alternative data when making underwriting decisions.

Alternative or non-traditional data provides a more holistic approach to your finance by assessing any information that isn’t typically found in a credit check. This information may include rent or bill repayments, including your cell phone, cable package, or insurance premiums.

There’s even a growing push to consider information that isn’t directly connected to your finances. Alternative data could one day consider soft-data points, like a person’s education, job, social media presence, purchase histories, or Internet searches.

According to the International Monetary Fund, the relationship between your finances and how you use tech could broaden borrowing opportunities to people typically denied funding.

How Artificial Intelligence Calculates Alternative Data

Artificial Intelligence comes into play with how FinTech services build credit models that crunch this information. When programmed correctly, they can learn how to provide deeper insights into a person’s finances, lifestyle, preferences, and behavior. 

Rather than building AI around limited structured data (like credit scores or incomes), FinTech employs machine learning that can go beyond hard financial data to assess subjective (or qualitative) factors like your social media activity.

When going through large, complex data sets like social media or bill payments, AI sets a pace no human can match, and it can deploy predictive analysis to this data in real-time. It also reduces human error or oversight that often occur when the same analysis is done manually.

The Advantages of Using Alternative Data

Increasing AI’s data sets to include alternative information can help those borrowers who are responsible with money and have a bad score. This process can consider other sources (like alternative bill payments) to determine if they’re likely to pay bills on time.

Looking at your LinkedIn or Twitter account can reveal a lot about your employment status and spending habits that aren’t apparent in your credit history, too. Including this soft data paints a broader picture of your current financial situation. This data may show you’re a high-earned who’s responsible with cash compared to a credit score that may still reflect a mistake from your past.

Another big advantage of alternative data is how it can be automated, making it a faster option than manual applications. Automating this part of the lending process can also lower operating costs for financial institutions. And with fewer overheads, financial institutions may share these savings with their borrowers.

The Disadvantages of Using Alternative Data

As with anything in life, every coin has two sides. For every advantage, there are possible disadvantages to broadening creditworthiness beyond the typical credit data.

By far the biggest potential con is how difficult it may be to stratify and systemize this data. Credit histories and scores, by comparison, are highly regulated by the government and third-party financial parties. Alternative data has yet to receive similar standards, making it more prone to errors and privacy concerns.

Without these standards, there’s also a possibility that alternative data may create a new kind of barrier for people looking to borrow money.

What makes someone’s social media presence creditworthy? Right now, it has no clear benchmark. This could make it hard to build alternative creditworthiness, as there are no obvious steps to improve your online image.

Bottom Line

Using alternative data is not something that will happen in the distant future; it’s already here. Today, the financial industry has evolved to use some non-traditional information during the underwriting process. According to Experian, 65% of lenders are using some information beyond the traditional credit report.

But how they integrate even greater soft data (like social media accounts) will depend on how they fine-tune different machine learning to handle these assessments.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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