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Alternative Credit Scores

If you are one of what’s often referred to as “underbanked,” have a whisper-thin credit record, or if you have no credit history, you are probably already aware of the issues and problems that can come with having a low credit score or credit rating.

How do people wind up with a low credit score?
Usually a low credit rating comes from one of two situations:

  • You have had financial difficulties in the past: Declared bankruptcy, defaulting on loans or credit cards, defaulted on medical bills, etc.
  • You have simply not accumulated enough financial information in the accepted places in order to develop a traditional credit score.

What makes building a credit score difficult?
Traditional credit scores are built on a small set of data, making it harder if:

  • You have no credit cards.
  • You’ve only ever had and used one credit card.
  • You don’t use your credit cards regularly.
  • You’ve only taken out one or two smaller loans

Are you one of the “underbanked?”
If you haven’t heard this term before, it refers to those who have short or non-existent credit histories, and those who do not use traditional bank services. If that describes you, know that you are not alone: 26 million people in the U.S. have no credit history with the major credit reporting companies. That’s about 10% of the American population!

Other demographic groups often considered “underbanked” include immigrants, who often have difficulty transferring their financial information between countries, and Millennials, who are relatively new in the job market and new to credit.

The rise of the alternative credit score
With so many people “underbanked,” the financial services industry is taking notice. Banks, lender and seller recognize that there’s a need to help underbanked people build a useful credit score.

Just what is an alternative credit score?
This new type of credit score compiles and tracks your payment history for regular expenses like rent, utilities, internet, telephone, insurance, student loan, and even subscription services. These expenses are not usually included in major credit agencies’ reporting, but they can show a credit-worthy payment history.

Alternative credit is not only legal, but growing daily. If you provide a lender with proof of non-traditional payment history (alternative credit score and rating), the lender is required by law to factor it into their credit evaluation.

What is alternative credit based upon?
You’ve most likely been making trackable payments of one kind or another for most of your adult life: Rent payments, utilities, telephone, insurance, and internet access. You may also be paying monthly for streaming services like Netflix or Hulu, or for cloud apps and storage such as Dropbox or Office 365.

By linking those accounts to a tracking provider, regular payments will be factored into your alternative credit score. You’ll then have something concrete to give potential lenders.

Who will accept an alternative credit score?
In fact, more than 8,500 companies throughout the U.S. use alternative credit reports, and more are using them each year.

There are, however, specific businesses that are especially interested in using nontraditional credit reports, including:

  • Car dealerships
  • Jewelry stores
  • Electronics retailers
  • Furniture stores
  • Property managers and landlords
  • Financial services providers, like PayDayHawaii 

Why should you use an alternative credit score?
It’s a great way to proactively improve your credit score. Once you have built up your alternative credit score, other, more traditional, credit providers will see your payment track record and be more inclined to offer you credit, and potentially at better terms.

Where do you start?
One company that offers this service is PRBC, the world’s largest provider of non-traditional data to the credit market. Sign up is free and you can use their tools to set up your account tracking to get your free alternative credit score. PRBC verifies your bills and payments automatically and in real time once you link your accounts to their secure database. You can also manage and organize your bills and accounts in one place, even setting up bill payment reminders.

Of course, there are additional companies that provide alternative credit services; RentalKharma is one.

Choosing an alternative credit company
Check to see what each company’s fees are, what their security protocols are, exactly where they will be drawing your payment information from, and what services they offer.

Is getting an alternative credit score worth the effort?
Yes, it is. With alternative credit, you CAN create a positive impact on your credit ratings and credit score. By starting to build your alternative credit score you’ll be building the path to improved economic security, more housing opportunities, more and better employment prospects, and greater purchasing power.

This entry was posted in Financial Education, Legal Matters, Personal Finance for Real People, Selecting and Using Credit, Using Financial Services and tagged , , , , by sandynight. Bookmark the permalink.

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