It can be very hard to be approved for a loan without good credit, but what about the 53 million Americans don't even have a traditional credit score? These people haven't had any payments reported to the major consumer credit bureaus, because they've never received a loan or a credit card. But in the last few years, several companies have begun looking for new ways to offer financial services to these so-called "credit invisibles." These non-traditional credit reporting agencies are often called alternative credit agencies.
Traditional Versus Alternative Credit Reporting
Traditional credit reports were designed to measure a person's likelihood of repaying a new loan by using information about past loan repayments. Later, credit scores were created to automate the way this data is interpreted, so the lender would receive a single number in a range from "poor" to "exceptional." This way, a lender doesn't have to read someone's entire credit report in order to make a judgment about his or her creditworthiness. However, this traditional method is unable to identify people who are financially responsible, but have never taken out a loan.
|Feature||Traditional Credit Reporting||Alternative Credit Reporting|
|Credit score range||
|Factors that determine creditworthiness||
-Loan repayment history
-Length of credit history
-Payment history for monthly bills
|Types of accounts used||
All the accounts used by traditional credit reporting, plus the following bills:
-Utility bills such as heat, electricity and water
-Landline and mobile phones
-Cable and satellite television
|Credit reporting agencies||
TransUnion CreditVision Link
|Includes self-reported payments?||
How Can Alternative Credit Reporting Help Consumers?
If you are one of the millions of Americans who have very little information on your credit report, or no traditional credit score at all, then you may have been unable to enjoy the advantages of having good credit. The benefits of good credit can include the ability to rent an apartment, open a credit card account or be approved for a car loan. But at the same time, it can be difficult to establish a credit history without receiving a loan in the first place.
Thankfully, alternative credit reporting agencies can use information from payments other than those made on loans. For example, an alternative credit reporting agency can include your rent payments to show that you are making on-time payments. Other types of bills included in alternative credit reports may include utility bills, insurance payments, telephone bills and charges for Internet service.
Types of Consumers Who May Benefit from Alternative Credit Reporting
Newly arrived permanent residents of the United States are faced with the tremendous challenge of re-establishing themselves financially. Even if they enjoyed excellent credit in their native country, new immigrants will have to begin building a credit history from scratch in the United States. By showing proof of payments for things like rent and mobile phone service, recent arrivals can use an alternative credit report to be approved for new loans sooner than they would have with a traditional credit score.
Americans who grew up during the Great Recession are more likely to avoid credit cards and other forms of credit than previous generations. And while young adults might feel like they are being responsible by avoiding debt, they may not have the traditional credit history necessary to qualify for a home mortgage or a car loan. By having their rent and other bills included in an alternative credit report, they can receive loans necessary to build traditional credit history.
The term "underbanked"s to people who have had little access to traditional financial services. These can be people who move frequently, who have low incomes or who have language or mobility barriers to mainstream banking services. People who have little engagement with banking services may not have credit cards or other loans whose payments are reported to traditional consumer credit bureaus. Nevertheless, many of these individuals reliably pay their rent, utilities and other bills, which can be reported to an alternative credit agency, making them excellent candidates for a loan.
How to Start Getting Credit for Your Monthly Bills
With traditional credit reporting, your creditors will automatically report your bill payments to the major consumer credit bureaus, and there is little you can do to facilitate it. However, with alternative credit reporting you can take steps to ensure that you bill payments become part of your credit score.
The first step is to create accounts with one or more alternative credit reporting agencies. In most cases, this involves simply filling out a form online and creating a username and password. With some programs, enrollment is free and available to adults age 18 and over. And while some alternative credit reporting programs are free to use and paid for by lenders, others charge fees to use the service.
Next, you will need to identify qualifying bills - that is, those that help you qualify for credit -and add them to your account. For example, you can choose to report home rental payments, Internet service bills, phone bills, utility payments, student loan payments, insurance premiums and rent-to-own payments.
Each payment will first need to be verified with the biller before it becomes part of your new credit report. You may also be asked to submit information on your bank accounts to help the company automatically verify your payments. You may also be able to submit information on your employer or multiple employers. In addition, some alternative credit companies will even allow you to submit records of past bill payments.
Once you establish an account with an alternative credit bureau, you can download your credit score and credit report to see how your information will be viewed by potential creditors. Finally, you can use your report to apply for a loan or a line of credit. In many cases, the creditor might purchase a report from the alternative credit reporting agency.
If a particular lender does not subscribe to your alternative credit reporting agency, you can offer it voluntarily. In fact, the Equal Credit Opportunity Act requires businesses to consider non-traditional credit information. You can also use your alternative credit report to apply for an apartment lease or some other application that requires a credit check.
Alternative Credit Reporting Factors
While traditional consumer credit reports are limited to revolving lines of credit and other types of loans, there are many kinds of payments that can contribute to your alternative credit score.
These payments can include those for:
|Monthly rent bills||Electricity bills||Water bills||Natural gas bills|
|Home telephone service bills||Home telephone service bills||Insurance payments, including auto insurance, renters insurance and health insurance||Rent-to own payments|
|Cable television service bills||Satellite television service bills||Child day care bills||Lawn care bills|
|Medical payments||School tuition||In-home care payments||Subscriptions and memberships|
To get started on generating a new alternative credit score, you can create an account with one of the following credit reporting companies:Rent payment and reporting companies: These companies may generate alternative data, but do not accept information from consumers:
Expert Q & A
Beverly Harzog is a nationally-recognized credit card expert, consumer advocate, debt coach, speaker and the award-winning author of The Debt Escape Plan. We asked her for her perspective on alternative credit reporting.
How does alternative credit reporting help lenders and consumers? Are there any downsides to it?
It opens up the credit market for consumers who might not qualify for traditional credit products such as car loans and mortgages. There's still a large part of the population who is "unbanked,"ng they don't have checking accounts or other relationships with traditional banks. If handled responsibly, this gives those consumers a chance to rebuild — or establish — credit so they can eventually qualify for loans or credit cards with great terms.
A great credit score helps consumers save money in other ways. They pay less for health insurance, auto insurance, mortgages and much more. Other consumers have decided to go the alternative route because they think they'll get a better deal. Prosper and Lending Club both offer P2P loans at decent rates if a consumer has good credit. So it's a good idea for all consumers to do a little research before deciding where to apply for credit. Having alternatives in the marketplace is good for both lenders and consumers. As for the downside, if a consumer doesn't repay a loan in a responsible manner, their credit score will suffer. They could also end up paying a lot in interest.
How can a consumer show that they're a good credit risk through their monthly payments? How do they go about reporting those numbers?
You can ask your landlord and/or utility companies to report your payment history to the major credit bureaus. It will be a listing on your report, but the credit score algorithms might not include it in your score calculations. A few do, such as VantageScore. Another way is to use a company like eCredable, which collects your payment history and provides that information to you. You can then show a potential lender, who is legally required to look at the report.
What are the general industry trends around alternative credit reporting? Are more lenders seeing it as an option?
As long as the need exists, alternative lenders will find a market. It's actually a good system because it gives disenfranchised consumers a chance to either rebuild credit — or if they have great credit, to find the best terms possible.
The Federal Trade Commission (FTC) works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. Its website offers information on credit and loans along with dealing with debt.
This document offered by the FTC let's you know your rights under the law when it comes to credit reporting. It also lists ways that you can report violations for enforcement.
Founded in 1992, the NCRA is a trade organization of consumer reporting agencies and associated professionals. Its website offers consumer information resources including facts on alternative credit and credit repair.
This government agency created after the 2008 financial crisis to protect consumers using financial products, much like the Consumer Product Safety Commission regulates the safety of manufactured goods.
This list is offered by the Consumer Financial Protection Bureau and includes information on companies that compile lists for employment, tenant, bank, medical, subprime and other forms of credit reports.
is an organization that partners with corporations, industry leaders, NGOs, public development agencies, multilaterals and other nonprofits to deliver innovative solutions to the alternative credit industry.
This is a subsidiary of PERC that was launched in 2013 to house PERC's extensive advocacy, research and solutions development activities.
This is another subsidiary of PERC that works to provide financial solutions to develop solutions for "credit invisibles."