The rise of alternative credit scoring has led to the creation of a broad-based credit scoring method. Unlike credit scoring mechanisms, this is effective for people who are not exposed to any credit and financing history or ecosystem.

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How alternate credit scoring works?

According to Pranjal Kamra, CEO at Finology, new-age alternate scoring companies use tangible factors like a digital footprint to determine the creditworthiness of a new customer while using alternative scoring.

"Lenders use AI-based models to interpret the overall bank balance, e-commerce transactions, payment history, travel range or expenditure blueprint. These models offer sufficient validation to lenders regarding the creditworthiness, good intent and capacity of an applicant towards successfully repaying his/her loan," Kamra explains.

Additionally, Abhishek Soni, CEO and co-founder at Upwards tells that SMS-based financial transactions, social media accounts, and other digital footprints are also assessed.

How beneficial is alternate credit scoring?

As per Nitin Mathur, CEO at Tavaga, credit scoring agencies indulge in big data crunching with the help of artificial intelligence (AI) and machine learning (ML) techniques to determine creditworthiness. The tie-ups of these credit scoring agencies with leading Indian lenders such as HDFC Bank, Bajaj Finserv, and Axis Bank, in turn, help first-time borrowers to avail a loan without showcasing any credit history.

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While typical credit scores derived from previous borrowings are not taken into consideration by the fintech companies, Mathur adds that the credit scoring agencies evaluate the ability and willingness of the prospective borrower.

Apart from helping customers in getting loans, this also helps lenders in accessing the untouched geography of loan disbursement. Additionally, with these scores in place, borrowers do not need to provide many other documents which are required by conventional lenders.

What is the need for alternative credit scoring?

Traditional lending agencies have had a history of using thick files and other bureaucratic procedures to lend to an individual as prescribed by the regulators. Adding to the woes, students, millennials and other individuals with no credit history had a difficult time availing themselves of a loan.

As a result, Mathur believes that early adopters of fintech have solved this problem and ensured smooth credit flow to first-time borrowers.

How can one avail it?

In order to avail of alternative credit loans, Kamra suggests that a user must pay his/her bills on time and possess a good intent to prove the creditworthiness of his/her application. The better the online and financial behaviour will be, the higher chance the will have of approvals.

According to Soni of Upwards, alternate credit scores are increasingly used by online lenders, particularly for sub-Rs 1 lakh loans.

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