So you don’t have an excellent record with the traditional credit-monitoring bureaus. Okay, but that doesn’t mean that you can’t get a loan for a house or a car. Although traditional credit – the kind that’s defined by charging and repaying our credit cards – is the most common thing that lenders look at to determine eligibility for a loan, there are other methods they can use to approve you. You just need to remember to ask.
So what heck, then, is alternative credit? To put it briefly, it’s a record of all of your purchases, and it can be used to show that you are capable of making payments on time. This record includes your bank statements, your receipts for your rent and utilities and even your child support payments.
At the moment, more than 50 million Americans lack a traditional credit score. Who are they? These “thin-file” or “no-file” customers might be recent immigrants who have full-time jobs but who haven’t been citizens long enough to generate credit. They could be young professionals who earn $70,000 a year but who suffer from the same problem. For people like this, records of alternative credit may be the only way to get a mortgage or some other large loan. The only problem is that many consumers don’t know that they can use these documents to sway a lender’s decision in their favor.
Under the Equal Credit Opportunity Act, lenders and businesses must be willing to consider a consumer’s alternative credit history when appraising them for a loan or service. But according to Steven Ely, CEO of monitoring company eCredable, “Most consumers don’t know about this law, and most creditors don’t want to enlighten them. Why? [Because] creditors have no easy way of accepting and using this information in making risk related business decisions.”
So alternative credit creates a little more work for lenders. That doesn’t mean that you shouldn’t make them check it when you want a loan.
For years, the credit monitors have been aware that bills and bank statements are a viable way to prove financial eligibility. In fact, FICO (the company that determines credit scores) even created the “Expansion Score” to account for alternative credit for “thin-file” consumers. The score operates within the same 300-850 range as a traditional score, but instead of calculating your credit card history and use, it factors in your public records, bank accounts, payment histories and assets. After thorough analysis, FICO found that this expansion score is just as accurate as the traditional score at predicting consumer reliability.
The best news for consumers is that alternative credit is finally starting to gain some traction, despite its status as the best-kept secret in the credit industry. The credit crunch of 2008 hit everybody’s credit rating hard, and since then more and more lenders have started to use alternative credit as a reference when investigating scores that seem a little too low. According to a Collections & Credit Risk report, 15 of America’s top 20 lenders now check with alternative credit monitors like L2C, PRBC and Ely’s eCredable when vetting a consumer for a loan.
“Say a 620 used to be your cutoff. Now your cutoff is a 680,” says L2C CEO Mike Mondelli. “A lot of companies are looking to determine if they can go back into that range safely, back to 620. They are using alternative data to figure out who the best folks are from that group.”
So if you’ve recently been turned down for a loan even though you’ve been paying your bills on time, cheer up. There’s a good chance that your lender didn’t take your alternative credit into account when they decided not to approve you. Gather all of your bank statements and other records and give your lender a call. With a little persuasion, you might be able to finance that new home after all.