How alternative credit scoring models can help you get scored

By Douglas Matus 

Unless they plan to apply for a new credit card or loan, most people give little to no thought about their credit scores. 

In fact, many people do not even realize the impact that credit scores have on everyday things such as cellphone contracts, housing rentals, insurance policies and utility bills.

If you are one of the more than 50 million U.S. consumers that lack a FICO credit score, you’ve certainly come to appreciate the importance of credit for seemingly routine financial arrangements. 

For those who lack credit, the achievement of a score often seems like a chicken-and-egg scenario: you cannot get credit without a score, and you cannot build your score without credit.

To deal with this paradox, companies have developed alternative scoring models that take into account other financial activities. 

To encourage this practice and make credit more accessible, FICO has begun to use this data. Alternative credit scoring may not work for everyone, however; before you enroll in a program, you’ll want to understand how the process works.

What is Alternative Credit Scoring?

In recent years, alternative credit scoring has become more prominent thanks to growing numbers of consumers with underdeveloped credit profiles. The practice itself is nothing new, though, explains Kevin Haney of A.S.K. Benefit Solutions.

“Alternative credit scoring emerged during the 1990s to help continuity clubs manage risk and let telecommunications companies provision new accounts for no-record population segments.”

In April of 2015, FICO announced that it would begin to use alternative scoring models to designate credit scores. Priyanka Prakash, a small business finance specialist for FitSmallBusiness.com, explains this decision:

“According to FICO, about 15 million Americans who were unscorable can now receive scores under the new model. This will make it easier for them to qualify for loans or credit cards.”

What Sources Do Alternative Credit Scorers Use?

Alternative credit score providers use data that most consumers accumulate naturally. Practically any bill — including rent, child-care payments, rent-to-own agreements and monthly subscription services — can provide fodder for an alternative credit score.

“The score is determined by things like timely rent payments, your monthly payment history, and a verifiable source of income,” explains David Bakke of MoneyCrashers.com. “You may have to pay a small fee to have your score generated, however.”

Public record data such as your address history can also contribute to your alternative credit score. The rationale here is that the information helps establish your identity, and prevents fraudulent applications for credit.

How Does it Work?

Alternative credit scoring presents a general picture of a consumer’s reliability. In the absence of a credit history, your ability to make other kinds of payments and hold a job become determining factors.

“Alternative credit scoring works by using data to predict future payment behavior for consumers who do not have an existing credit files,” says Kevin Haney.

Companies and banks that analyze alternative credit lines generally look at payment behaviors spread out over a period of months or years. If your rental history comes under scrutiny, your landlord may provide a record of your payments, length of time at your address and the amount of your rent.

“In reference to rental history and all alternative credit trade lines, we like to see 12 months canceled checks or 12 months bank statements that show payments,” explains David Hosterman, branch manager of Castle & Cooke Mortgage.

These scoring models have particularly viability for immigrants, recent college graduates, or anyone who lacks the paper trail of loans and credit cards. As Hosterman points out, the benefits extend even further across the consumer spectrum:

“Given that many Americans had challenges during the Great Recession, any new information that can help differentiate a high-risk individual would be useful.”

In other words, if financial difficulties led you to miss some credit card payments, but you still paid your rent and other bills on time, alternative credit scoring may work in your favor. It’s important to realize, however, that alternative scoring does not absolve you of bad financial behavior. Regardless of the scoring model you use, financial responsibility remains the only way to showcase your credit-worthiness.

Written on October 27, 2015

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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