Credit Challenged? How Alternative Credit Data Can Help Those With Little or No Credit

If you've got no credit file, or a very thin one, you know how hard it can be to get a credit card or loan. Without a credit record, you can't get a credit score, and lenders can't easily judge how much of a credit risk you are.

Don't give up. Lenders are slowly beginning to consider other kinds of information when making credit decisions. That may help you get approved for credit, even without a traditional credit score. But it's important to also understand how this so-called alternative data is used, and the implications for your privacy.

What is alternative data?

Traditional credit data relies on information about how you've used credit or debt in the past. It is compiled by the three major credit bureaus: Equifax, Experian, and TransUnion. That data is then used by the major scoring companies, FICO and VantageScore, to build your credit scores. (See also: How to Read a Credit Report)

Maybe you haven't had experience with credit, or you had a negative experience that doesn't tell the whole story of how you would behave now with a new loan. Alternative data providers look at how reliably you've paid rent, utility bills, or rent-to-own agreements. They dig up nonpayment information, too.

For instance, LexisNexis Risk Solutions gathers publicly available documents that show your professional licenses, evidence of college attendance, ownership of assets such as a home or boat, felony convictions, and your address stability. "Address stability is the concept that if you're living in the same address for a period of time, you're more stable than if you're bouncing around four times a year," says Ankush Tewari, senior director of credit risk assessment at LexisNexis Risk Solutions. "Multiple client studies have shown that people who move frequently are riskier than people who have a stable address history."

LexisNexis Risk Solutions says the data it collects all has some proven ability to predict creditworthiness. By adding this sort of data to regular credit bureau data, it can help score about 40 million consumers who don't have a regular credit score. The company has paired with FICO and credit bureau Equifax to create an alternative credit score called the FICO Score XD. It's only for people whose credit files are so thin they can't get a regular credit score, and it relies on payment data from a consumer's utility, phone, and other bills.

According to FICO, the new score should allow lenders to score more than half of all previously unscorable applicants. It's found that more than a third of those people turn out to have a FICO Score XD of at least 620, the cutoff point many lenders use for even considering a credit application. That means more people should be getting approved for credit. The trouble is, the product is so new, FICO has not revealed how many lenders are using it.

TransUnion has had a similar scoring model called CreditVision Link since 2015, which incorporates a trended look at traditional credit data (how you've performed over time) with non-credit-related data collected from consumers' banking accounts, payday lending histories, and property, deed, and tax records. TransUnion told The New York Times that about 100 companies — primarily auto lenders and online lenders, but also an increasing number of credit card issuers — are using or testing the score. They're usually able to approve about 20 percent more applicants than they could before.

How alternative data can help you

The driving force behind the use of alternative data is lenders' desire to reach new customers who are creditworthy but can't show it through traditional means. "Lenders tell us, 'We don't need help declining more people. We need help growing our business but without increasing our credit risk,'" says LexisNexis's Tewari.

That should mean good news for consumers who have been responsible with their finances but who haven't had a chance to build credit or have stumbled along the way. Alternative data may help increase your chances of being approved for a loan or credit card. "It allows consumers to show that, while they may not be in a position to get a mortgage or a car payment, or they have no desire to get a credit card, they are still taking care of everyday financial responsibilities," says Kim Cole, community engagement manager for Navicore Solutions, a nonprofit credit counseling agency in Manalapin, New Jersey.

A new company called FS Card is using alternative data to offer a credit card called Build Card to people who would otherwise have been rejected for a credit card. Build Card's target market is consumers with credit scores of 620 or below, meaning their credit is considered subprime. In the past, the only kind of card these consumers probably would have been able to get is a secured card, which requires a deposit of several hundred dollars upfront.

Build Card asks applicants to agree to let the company use alternative data to assess their risk. In addition to traditional credit data, Build Card looks at payday loan information to determine whether an applicant is creditworthy. "We're looking for an inflection point that shows the consumer has changed and is able to take on regular credit," says Marla Blow, CEO of FS Card. Typically this means they've been able to close out a payday loan. "We're looking at the top 15–20 percent of payday loan users," she says.

If the applicant is approved, they'll be given a regular credit card — no security deposit required. Granted, there is a $53 upfront fee, APRs are 25–29 percent, and the initial credit limit is only $500. But it's a step up from a payday loan. And if you do well with the initial credit limit, you can eventually have it increased to $750.

Concerns about privacy and transparency

One of the biggest concerns with alternative data is that people don't know it's being collected and used. Not everyone wants their financial history and other information rounded up and made available to financial institutions. And, as with any organization that collects personal information, there is always the chance that a data breach could happen. It's one thing if information that was already publicly available is stolen, but it may be more worrisome if you've voluntarily shared payment information that then gets disclosed in a breach.

Beyond privacy and security, there are concerns about transparency. If you don't know what information lenders might look at when they're making lending decisions, you can't shape your behavior appropriately. For instance, maybe if you knew that bank overdrafts not only cost you money, but could also cause a lender to frown on your credit card application someday, you would be even more careful about not overdrawing. That's why some consumer advocates say you should first be asked whether you want to opt in to the collection and use of this sort of data.

Consumer groups also worry about the accessibility of information that's being collected. "People need to have access to data collected about them," says Linda Sherry, director of national priorities at Consumer Action. "They need to be able to verify that it's accurate and to put notes on it to say what's happened in their life to justify why these things are happening to them."

You already have those rights when it comes to data on your traditional credit report. The Fair Credit Reporting Act (FCRA) gives you the right to access your credit reports and if you find an error, it says the credit bureau must investigate and so must the bank or credit card issuer who furnished the data. The FCRA also requires creditors and employers to notify you if they've rejected you based on information in your credit report. That way, you can check the information and dispute it if it's incorrect.

LexisNexis says you also have those same rights with the alternative data it collects. If you are, say, turned down for a loan because you've got a lien or judgment, you should be notified of that and given the chance to dispute any inaccuracies in the reporting. "Alternative data must be compliant with the FCRA, which requires consumers have access to data that's used in credit decisions," says Tewari, who adds that his company allows consumers unlimited free access to the data it has on file. You can request it at any time, and as many times as you like. "They have the ability to review it and correct it if there's an error," he says.

What you can do

While data collectors and lenders are in the driver's seat when it comes to the use of alternative data, there are still some things you can do to build your credit.

1. Pay all of your bills on time

This is always important, but even more so in times when companies are collecting information about how you pay all kinds of bills. Keeping on top of payments could help you build credit that you'll need in the future. Avoid overdrafts on your checking account, too, as this is a costly behavior that could also mar your alternative credit profile.

2. Check your traditional credit report and dispute any errors

"If someone has been denied by the big lenders, that's a wake-up call that they need to go into their credit report, figure out why they're being denied, clean up the credit report as much as they can, and get back on track with a good credit history," says Consumer Action's Sherry. "That's the best way to show yourself as someone that lenders will trust."

3. Get a secured card

This is the traditional way to go, and it works. Save up $300, use it as a deposit on a secured credit card, get a $300 credit line, then only make a small purchase with it a few times a year. At the end of a year — maybe sooner — you should have built enough credit to get a regular credit card. (See also: The Best Secured Credit Cards)

4. Ask your lender to look at FICO Score XD

Since this scoring model is fairly new, you likely won't see any immediate results if you request a lender review it. Banks have to pay to get access to this scoring model. But eventually if lenders see enough demand from consumers, they will begin to adopt it. It certainly can't hurt to ask.

5. Consider providing your own alternative data

If you're applying for a loan, it may help to present letters of good standing from your landlord, utility providers, or other monthly services that you pay on time.

6. Don't worry — yet — about modifying your behavior to fit the FICO Score XD model

For instance, if you really need to change addresses for the second time in a year, don't hold back just because it might affect your alternative credit score. A whole host of factors goes into most lenders' credit decisions, so no one factor is given too much weight.

7. Monitor your alternative credit record

This is not as easy as monitoring your traditional credit record, but if you're interested you can find out who's collecting your financial details by consulting the Consumer Financial Protection Bureau's list of 42 consumer reporting companies. You'll have to check with each company's website to find out how to get your free annual report.

8. Correct mistakes if they arise

If you get a note that you've been denied credit due to a piece of alternative data, ask who furnished the information, and make sure it's accurate. You have the same right to dispute errors in alternative data as you do with traditional information on your credit report.

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