Emerging credit trends
Quick insights
- Emerging credit trends showcase patterns, advances and changes that are happening in the credit landscape.
- Keeping an eye on credit trends can help you stay on top of any changes that might impact you as a consumer.
- Alternative and artificial intelligence (AI) credit scoring, for example, are newer trends that consumers might be directly impacted by, such as including groups that might've been left out of traditional scoring methods.
There can be all sorts of reasons for new and emerging credit trends, such as changes to the economy. These external factors can spark trends like an increase in credit usage among consumers. New and advancing technology can also kickstart trends and influence the way the credit world works. The rising popularity of AI, for example, is playing a part in shaping alternative credit assessment methods.
When it comes to keeping up with changes to the financial landscape and how it might impact you, it can be helpful to be aware of emerging credit trends. What trends might you need to be aware of? Let’s find out.
AI and machine learning in credit risk assessment
As AI continues to advance and get implemented by companies, its role in financial institutions will continue to evolve. Instead of looking only at traditional scoring models and risk assessment and management, AI and machine learning might have a new role to play by helping to make credit scoring quicker and potentially more accurate.
Generative AI (gen AI) is also being used more in the evaluation of credit risk, but there is still a long way to go. Among the finance executives and companies that are using or planning to use gen AI for helping to assess credit risk, there are concerns about risk and governance.
Growth of embedded finance and consumer access to credit
Embedded finance, which is the integration of financial services into non-financial platforms, has grown in recent years as an alternative to traditional banking models. Retail stores offering a buy now pay later plan—even though they’re not a lender or financial institution—is an example of embedded finance.
New and advancing technologies, like application programming interfaces (APIs), have made this possible. For the unbanked or financially underserved populations, new and expanding credit options, like those that come through embedded finance, can be a way to get access to non-traditional lending options.
Alternative data in creditworthiness assessment
New and advancing technologies are also playing a role in how credit assessments are made and how they might impact consumers.
Alternative credit scoring is one of these trends. It looks at data sets and information that traditional credit assessment methods don’t typically consider. According to the Consumer Financial Protection Bureau (CFPB), traditional scoring models look at credit information like:
- Payment history
- Credit mix
- Credit utilization ratio
- Your current unpaid debt
- New credit inquiries
- How long you have had your loan accounts open
- Any foreclosures, bankruptcies or defaulted loans
Alternative credit scoring models, on the other hand, might look at the following information and more:
- Rental and utility payment history
- Online shopping behavior
- Social media or web behaviors
- Bank account information
- Employment and income data
Pros and cons to credit scoring with alternative data
Those with limited credit histories have often been in a difficult position of needing to build credit but unable to get approved for credit. Alternative credit scoring could be one solution for people in this situation.
However, depending on the data the models look at, as well as whether the consumers’ behavior is considered positive or negative, alternative credit scoring has the potential to hurt people’s credit—as well as help it. They also carry the potential to negatively impact credit scores depending on the quality and interpretation of the data used. Inaccurate or incomplete data may result in unfair credit assessments and regulatory scrutiny.
Overall, alternative credit scoring might be a way to bridge the gap and reduce exclusion for people who haven’t had access to credit before. This could give them more access to traditional banking, loans and other financial services they might not have been able to use previously.
In summary
Keeping an eye on emerging credit trends can help you stay on top of the latest in what’s happening in the finance world. From the development and utilization of alternative credit scoring, AI tools like gen AI and large language models, there’s a lot happening in the finance world.
How it will all look in the coming days, and how it will impact you specifically are yet to be seen. For now, it can be helpful to stay up to date on what’s happening so you can make the most informed decisions when it comes to your own finances.
