Alternative Credit Data and Scoring Models

You might not realize it, but your credit can affect your finances in a lot of ways. Credit scores can influence the rates lenders offer you and the cost of your insurance premiums. Credit may even come into play when you apply for new cell phone service, utilities, or apartment leases.

Despite the fact that good credit might save you hundreds or thousands of dollars per year, many people don’t have any credit scores at all. These people are sometimes called “credit invisible”. If you fit into this category, you’re not alone. Around 40 million Americans don’t qualify for a conventional credit score.

Having no score creates a chicken-and-egg style problem. It can be hard to qualify for new credit without a score. Yet without new credit, you can’t earn a traditional credit score in the first place.

Credit builder loans and secured credit cards may be helpful if you want to establish credit in a traditional way. But some lenders are also starting to look at information outside of your credit report to judge creditworthiness. This is known as alternative credit scoring.

What is alternative credit score data for credit scoring?

Did you know that there are many different types of credit scores? Believe it or not, hundreds and maybe even thousands of credit scores exist in the United States.

Despite the large number of scores, FICO and VantageScore remain the two biggest names in the credit scoring marketplace. According to FICO, 90% of top lenders use some version of the FICO Score to guide their lending decisions for a borrower.

Traditional credit scores, like the ones most lenders currently use, are based on data points found on your credit reports from the three major credit bureaus - Equifax, TransUnion, and TransUnion. Yet some scoring models may consider sources of information found outside of a credit report. This "other" information is known as alternative credit score data.

Some common examples of alternative credit scoring data include:

• Utility Bill Payments
• Telecom Payments (Cell Phone Bills, Cable or Satellite Bills, etc.)
• Rental Payments (see our related article about reporting rent to the credit bureaus)
• Bank Account Information

A history of alternative credit scoring

Alternative credit scoring methods have become more prominent in recent years. But alternative scoring itself is nothing new.

Kevin Haney, Founder of A.S.K. Benefit Solutions and former executive with Experian, explains.

“Alternative credit scoring emerged during the 1990s,” Haney says, “to help continuity clubs manage risk and let telecommunications companies provision new accounts for no-record population segments.”

Alternative credit data has also been used in custom credit scoring models for many years. Larger lenders often use custom or internal credit scores to tweak the way risk is evaluated for their specific customers and applicants. Custom scoring models that use alternative credit options may consider information that's outside of your credit reports with the three major credit bureaus.

Why alternative data sources are becoming more popular

Alternative credit scoring is becoming more popular now because there’s a growing demand for these products and for financial inclusion. More lenders are starting to see “credit invisibles” as an opportunity rather than the risk these consumers have been viewed as in the past.

Lenders are constantly looking for new customers for their financial services. As a result, some financial institutions are interested in finding safe ways to loan money to the growing number of people who don’t have traditional credit scores or credit history.

Alternative credit data can also provide better insights into the habits of consumers who do have traditional credit scores. More information is usually considered a good thing in the world of credit decisions and lending for a borrower.

Credit score designers are in the business of helping lenders predict risk — the risk of loaning you money. As the demand for alternative credit scoring methods grows, it only makes sense that credit score designers want to offer the best, most predictive scoring systems. Having the best products available is how any company tries to stand out from the competition.

Consumer-permissioned data

For decades, generic credit scoring has followed the same basic formula:

1. A data furnisher, like a lender or collection agency, shares your account management information with a credit bureau.
2. The credit bureau adds (or updates) the account on your credit report.
3. When you apply for financing, a lender buys a copy of your credit report and score from a credit bureau. (The credit bureau pays the score creator a royalty.)
4. The credit scoring model evaluates the information on your credit report and generates a score based on your creditworthiness (AKA how likely you are to pay on time).

Under this formula, only the information on your credit report could impact your credit score. And, the only way to add information to a credit report was for a data furnisher to supply it to a credit bureau. Translation: You couldn’t add an account to your own credit report if you wanted to.

Yet in late 2018, the system changed. A new credit score known as UltraFICO introduced the mainstream credit world to consumer-permissioned data.

UltraFICO and Experian Boost

UltraFICO was the first scoring model that let consumers themselves voluntarily add alternative data for a credit scoring model to consider. With UltraFICO you can opt in to the free service and give permission for FICO to review your checking and savings account history. See our own article about the UltraFICO credit score.

For the first time, one of your conventional credit scores could be influenced by information outside of your credit report.

Not long after the introduction of UltraFICO, Experian introduced the world to another alternative credit product known as Experian Boost. Boost took things a step further. You could opt-in and add certain telecom and utility accounts directly to your Experian credit report.

Rod Griffin, Experian Director of Consumer Education and Awareness, explains why Experian Boost is such exciting news for many consumers.

“In the past, your telecom and utility bills were only reported if you failed to pay them as agreed. Experian Boost enables you to get credit for paying your cell phone, cable television, natural gas, water and electric bills on time.”

Griffin goes on to explain that two out of three people who enroll in Experian Boost see an increase in their Experian credit score. The average score increase is about 13 points, and people with a thin credit file see an average increase of around 19 points.

Both UltraFICO and Experian Boost give you the opportunity to opt-in and allow other financial information to be considered in certain Experian-based credit scores, free of charge. Experian Boost works with any Experian-based credit score that considers utility data. UltraFICO is limited to FICO Score 8 and FICO Score 9.

Another product, eCredible Lift, lets you add utility information to your TransUnion credit report. However, the product costs $19.95 per year.

More alternative credit scoring options

Outside of the consumer-permissioned data, alternative credit scoring companies also exist. These companies may evaluate many different types of information in an effort to find new ways to accurately predict credit risk. Practically any bill — including rent, child care, utility payments and monthly subscription services — may be able to fit into an alternative credit scoring model.

“The score is determined by things like timely rent payments, your monthly payment history, and a verifiable source of income,” explains David Bakke of MoneyCrashers.com. “You may have to pay a small fee to have your score generated, however.”

However, you probably won’t see information like social media activity or cell phone usage considered in U.S. alternative credit scores. One reason this is true is due to regulatory concerns.

All credit scores that are used for lending decisions in the United States have to follow the Equal Credit Opportunity Act (ECOA). First, you have to prove a scoring model works and can accurately predict risk. Next, a credit score cannot discriminate against any protected class based on religion, marital status, gender, race, etc.

How to prepare your credit in the meantime

For now, most lenders still rely on traditional FICO Scores. You’ll be best served by learning ways to establish and improve your credit scores in traditional ways first. (Note: Because Experian Boost and eCredible Lift add information directly to your credit reports, they may influence traditional credit scores.)

Make on-time payments, pay your full credit card balances every month, and don’t apply for too much new credit at once. If you follow these rules, you should be off to a good start in the credit score department.

When you’re ready to take advantage of alternative credit scoring, the following tips may help.

• Pay all of your bills on time, even accounts that don’t appear on your credit profile.
• Maintain healthy banking habits (e.g. no overdraft, have an emergency savings, etc.).
• Always make your rent payments on time and with a check.

If you find a lender that uses non-credit bureau data to assess creditworthiness, the steps above may work in your favor. In the meantime, they’re good financial habits to develop.

Where do you stand?

Not only should you learn about what makes up your credit scores, it’s also critical to know where you stand. You can accomplish this task by checking your three credit reports often.

You can access free federally mandated reports from all three credit bureaus once every 12 months. Visit AnnualCreditReport.com to exercise this right. Once you’ve claimed your free reports, there are plenty of other places online where you can keep an eye on your credit reports and, if you like, your credit scores as well.

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See Michelle on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.