Many people assume that you automatically receive a credit report when you’re born or turn 18, but this is far from the truth. The three major credit bureaus (Experian, TransUnion and Equifax) don’t open a credit file on you until you apply for and start using a form of credit. Some people may live several years into their adult lives without ever getting to this point. There is a financial term for people who have little or no credit—they’re known as credit invisibles.
As of 2019, there was an estimated 26 million adults in the United States with a thin or stale credit score. Unfortunately, these people can find themselves facing denials on credit applications or approvals with incredibly high interest rates. In fact, a low or nonexistent credit score can stop a person from getting credit cards or loans, being approved for a mortgage or even getting hired for a job.
In response to this gap that’s leaving millions of Americans in a tough predicament, alternative credit data is becoming more popular.
What is alternative credit data?
Alternative credit data is information that allows lenders to have more insight into a person with a limited credit profile. Traditional credit data looks at factors such as:
- Credit card history
- Loan and loan repayment history
- Mortgage history
- Credit inquiries
- Public records, such as bankruptcy files
In comparison, alternative credit data looks at:
- Rent payments
- Utility payments
- Cell phone payments
- Payments for cable television
- Payments for subscription services, such as Netflix
- Money management markers (the amount of money in your savings, frequency of withdrawals and deposits and how long your accounts have been open)
- The value of owned assets, such as cars or property
- Payments on alternative lending methods such as payday loans, rent-to-own payments, installment loans, auto title loans and buy-here-pay-here auto loans
- Demand deposit account (DDA) information (recurring payment deposits and payments, average account balance, etc.)
This alternative credit data is valuable information that can provide a clear picture of how risky a consumer is. For example, if a person has never missed a payment or made a late payment on their rent, has a decent amount of savings in their account and has steady recurring income, then you know they’re responsible with their money. Alternatively, a person who frequently makes late rent and cell phone payments will likely behave the same with credit payments.
How can alternative credit data be helpful?
Alternative credit data can give you a score if you don’t have one or boost your current score. Many people have ended up—either intentionally or unintentionally—as credit invisible. This means FICO doesn’t have enough information on them to determine a credit score.
After opening your first credit account, you’ll have to wait another six months before FICO issues a credit score on your profile. This is because the system needs at least six months’ worth of data to establish a pattern of behavior.
People can become credit invisible for various reasons. They could have spent years in a mostly cash job, such as serving or bartending, and never bothered to open credit. Or maybe they were scared of debt and avoided credit to avoid temptation.
Whatever the reason, credit invisible people can’t get very far without traditional credit data to back them up. Having no credit data is like a vicious cycle—it’s challenging to get approved for credit products without having credit information. So these people struggle to improve their thin profiles even when they want to.
However, in recent years, alternative data has grown in popularity because lenders have started to see this market segment’s value. It was previously assumed that those with thin credit were risky individuals. Now, it’s become more and more apparent that many of these people are potentially safe individuals who would be responsible with credit.
Does alternative credit data really work?
Yes, alternative credit data really works and is used by major credit bureaus and lenders. Additionally, alternative credit data is recognized by the Equal Credit Opportunity Act (ECOA). The ECOA requires that all credit scores:
- Prove the scoring model can accurately predict risk
- Don’t discriminate against any protected class based on marital status, gender, race, religion, sexual orientation, etc.
Alternative credit data can help both consumers and businesses. It gives more credit opportunities to the credit invisible who have a track record of being financially responsible. Of course, some people with thin credit profiles are high risk. But a report titled “Research Consensus Confirms Benefits of Alternative Data” found that a significant portion of credit invisible people are low to moderate risk.
Options for alternative credit data
There are a few options when it comes to alternative credit data.
In 2018, FICO introduced its UltraFICO score to help those with a thin or nonexistent credit profile. Consumers simply need to link their bank accounts with their FICO score to provide additional indicators of sound financial behavior. If a consumer is financially responsible, they might see an increase in their FICO score. This is a free service and only requires a voluntary opt-in.
In response to UltraFICO, Experian quickly followed and introduced its Experian Boost service. This free service allows consumers to link their bank accounts to their Experian profile to provide the credit bureau with more financial information. Experian says that, on average, consumers saw a 13-point increase in their credit score with Experian Boost.
Note that to benefit from this service, the lender you’re using will need to pull FICO Score 8 or higher and use Experian as the credit bureau of choice.
Level Credit is a company that promises to help “consumers build the credit they deserve.” Through Level Credit, consumers can link their bank accounts and have their rent payments reported in their credit profile. Level Credit verifies the payments and reports it to the credit bureaus on your behalf.
It’s important to note that to benefit from alternative credit data, you’ll have to use a lender that is willing to or already does use this type of information when evaluating potential borrowers. While many lenders are slowly starting to adopt these alternative scores, it’s not completely widespread across all credit lenders yet. Consider asking your lender up front if they consider alternative credit data before you apply with them.
How does your credit look?
Now that you know what alternative credit data is, it’s time to decide if you need it. First, know where your credit stands. Get a copy of your credit report and credit score. If you have a thin profile or a low credit score, you may need alternative credit data. Remember that alternative credit data will only benefit you if you’ve been responsible with payments.
Even if you’re relying on alternative credit data right now, it’s never too early to start building up your traditional credit data. You can improve your credit score by making payments on time, reducing your debt and keeping your credit utilization ratio low. Starting these behaviors early will also set you up for success so you’re always making financially sound decisions.
Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.
Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
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