Is There An Alternative to Having a Traditional Credit Score and Report From the Credit Bureaus?
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Building credit can be a chicken-and-egg scenario: You need credit to build credit. Where does that leave the student who is applying for their first credit card? Millennials with no credit? What about someone with a thin credit history, or who simply lives debt free? Let’s look at alternative credit, and how you can obtain loans with little or no traditional credit.
What is Alternative Credit?
In short, alternative credit looks at different factors than traditional credit score calculations, like FICO and even VantageScore. Instead of looking at loan repayments, alternative credit looks at paying utility bills, rent, cell phone bills, even Netflix or your gym membership. For example, FICO XD looks at alternative sources of credit. It boasts that 70 percent of consumers who were previously unscored were able to obtain a credit score through non-traditional credit.
With alternative credit, you may be able to convince a landlord to approve your rent application, or even convince an car dealership to agree to an auto loan.
The purpose of alternative, or nontraditional credit, is the same as traditional credit: to measure risk for lenders and other people with money or property on the line. The goal is to put a number to risk for those who don’t fit the traditional scoring model — people who don’t have conventional loans, debts, or other credit history items to speak for their trustworthiness.
Alternative Credit Bureaus
Anyone who has had to deal with credit has heard of Experian, Equifax, and TransUnion. The “Big Three” credit reporting agencies are the primary sources for requesting your credit score. But that hasn’t always been the case, and there are still a few other, smaller bureaus.
Innovis, for example, aims to offer the same credit reports as the Big Three. It offers a free credit report once per year, along with dispute resolution, fraud and active duty alerts, and a security freeze.
Unlike Innovis and the Big Three, PRBC goes the non-traditional credit route while still acting as a Credit Reporting Agency-registered bureau operating under the FCRA. Originally called Pay Rent, Build Credit, PRBC reports on rent, internet and phone bills, utility payments, student loans, insurance, and rent-to-own payments. Their goal is to help the 26 million people who have no credit score according to the Big Three, serving the “underbanked” with only one credit card, one or two loans, or a short loan history. They boast 8,500 businesses using their credit score, increasing steadily every year, offering a true alternative to traditional credit scores.
They score credit between 100 and 850 instead of 350 to 850, though any score above 750 is considered good.
Private and Peer-to-Peer Loans
If you are using a non-traditional credit score, banks and lenders may be reluctant to approve loans. While they may accept the score, they still may not approve the loan. In this case, your alternative credit may be put to better use by a your peers.
Peer-to-peer lending, also called private lending, is essentially borrowing directly from a lender. There is with no financial institution, such as a bank or credit union, as a middleman. Instead, the middleman is a digital service, linking you to the peers that will judge whether they want to loan you money. The service takes their fee, performs a credit check — which is why you will want the alternative credit score ready to explain your low or non-existent score — and matches you, offering a low interest rate due to low overhead costs.
First, you post the loan amount. The service then matches you to a lender, and it’s up to the individual to decide whether to offer a loan or not. You can offer proof of income or references, as well, in order to bolster your argument.
If non-traditional credit is unable to sway them, you may have to bite the proverbial bullet and ask friends or family.
Building Credit the Traditional Way
The best way around all of this would be to build traditional credit. Apply for a credit card and use it, but be sure to not overspend. If you unable to open a credit card account, you may be eligible for a secured credit card. You can start by adding subscriptions to the card. Here’s other ways you can build credit:
- Make sure your landlord is reporting your rent. Paying rent on time and in full can be reported to the credit bureaus, but your landlord is not obligated to do so.
- Become an authorized user on a credit card. If a friend or family member practices good financial habits and has a healthy credit score, ask to become an authorized user on their credit card. So long as they pay the bill for the minimum amount on time, you will both build credit.
- Get a loan with a cosigner. While this puts more risk on the person co-signing with you, it also means you are more likely to get a loan. Paying off the loan on time means you’ll build credit, and no longer need a cosigner for the next time you approach a lender.
- Dispute any inaccurate entries on your credit report. If it’s actually an error, it is just bringing down your score. Otherwise, removing an inaccurate entry until it is corrected could bump your score temporarily. You can find more information and letter templates at our dispute letter resource center.
Alternative credit scores can help you attain a loan, mortgage, a car, or help convince a landlord to rent out to you, but a traditional credit score will always be best. Use non-traditional credit as a foot in the door to building credit, and use good financial practices to keep your credit score high.
Looking for more information on credit card scores or alternatives? Visit our credit score resource center for more information.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated May 2, 2018. It was originally published October 17, 2017.