It's not an easy road, trying to build your credit when you don't have any.
And, if you lack a credit history, but always pay your bills on time, you might be tempted to sign up with an alternative credit bureau to get a credit report that reflects your good payment history.
“It's a Catch-22,” says Steve Ely, CEO of eCredable, an alternative credit reporting company. “Nobody wants to give you credit unless you have credit.”
Alternative credit bureaus compile information such as rent, utility and even payday loan payments into an alternative credit report and score for the consumer. They charge a fee, either to the consumer or any lender that requests the report.
Alternative bureaus' biggest advantage? Your alternative credit report is all in one place, organized and ready to be pulled by landlords and lenders.
However, when making decisions about whether to extend credit, virtually all lenders use traditional credit reports, compiled by the three major credit bureaus, Equifax, Experian and TransUnion, says John Ulzheimer, a credit expert with CreditSesame.com.
The three major bureaus collect information about a consumer's credit accounts, such as credit cards, mortgages and auto loans, which they use to create a credit report and score. Once a year, by going to AnnualCreditReport.com, you can get a free copy of your report from each bureau.
“It's really not difficult to build a traditional credit file,” Ulzheimer says.
Also, a provision of the federal Equal Credit Opportunity Act requires that, when a consumer requests it, lenders consider alternative credit information when deciding whether to extend credit, experts say.
So, you can present a report from an alternative credit bureau and ask a lender to consider it, experts say. But, there is another way to get your alternative credit information to a lender: Do it yourself.
Compiling your own information is informally referred to as “shoebox credit,” Ulzheimer says: “It's like someone walking into a branch of a bank with a shoebox full of receipts showing they paid their rent or their utility bills or their gym membership on time.”
How does alternative credit reporting work?
Consumers who use alternative credit reporting might lack a credit history because they're very young, they avoid debt by choice or they can't get a credit card or loan due to their lack of credit history.
Alternative credit bureaus such as eCredable and PBRC, which stands for Payment Reporting Builds Credit, track your payments on accounts that creditors typically don't report to the three major credit bureaus.
Examples of accounts that can be used include rent, cell phone, landline, water, gas, cable and even payday loans or car title loans, Ely says. The alternative credit bureau then creates an alternative credit report and score you can use to present to lenders.
eCredable works with two lenders — RoadLoans.com for auto loans and Churchill Mortgage Corporation for home loans — that have agreed to use eCredable reports when deciding whether to make a loan, Ely says.
It's important to consider the cost of any service you plan to use, Ulzheimer recommends. PBRC is free to the consumer, but charges lenders to check a consumer's PBRC credit score, which can range from 300 to 850, according to the PBRC website. eCredable is free when you sign up, and it has an A to F rating system rather than a numerical score, Ely says. However, when you want to use your eCredable report to apply for credit, you must pay $20 per account to have your accounts manually verified, Ely says. A typical consumer with an A rating has five accounts and pays $100, he says. The verification is good for 45 days, according to eCredable's website. In contrast, the traditional credit bureaus don't charge the consumer.
Alternative credit bureau pluses and minuses
If you're considering signing up for an alternative credit reporting service, you should consider the pros and cons, experts say. Here are three advantages:
You don't have to wait months or years to build a credit history. Building a traditional credit history can take a while if you start with one account – say, a secured credit card – then slowly bulk up your file by adding a traditional credit card and maybe an auto loan down the road. However, many consumers already have several accounts that could be added to an alternative credit file, Ely says.
You choose which accounts get used. With eCredable, you provide the account information for the accounts you want considered, Ely says. For example, you could include your rent, which you've always paid on time, but exclude a cell phone account that may have late payments. However, a consumer must have several accounts with a good payment history to get an A rating, Ely says.
If you already have accounts, you can get a credit history quickly. Some consumers use eCredable when they apply to rent an apartment and a landlord requires either proof of good credit or a very large security deposit, Ely says. When you sign up for eCredable, the company can look at your past two years of payment history and generate a credit report and score right away, Ely says.
Here are three drawbacks to alternative credit bureaus:
Most lenders don't use alternative credit reports. If you walk into Chase or Bank of America or Wells Fargo to apply for a credit card or loan, they will pull credit reports and scores from the three major credit bureaus, not an alternative bureau, Ulzheimer says. “You can spend time to build this impressive alternative credit report, but does anyone know it exists and can you leverage it as a consumer?” he asks. You can ask a lender to consider your alternative credit report, but 95 percent of lenders assess customers' eligibility with what is called automated underwriting, in which computers are used to review an application for credit, Ely says.
When you use an alternative credit report to get a loan, you pay higher interest. Consumers who choose to go the alternative route likely will end up paying more in interest, Ely says. For example, a consumer with an A rating from eCredable who gets an auto loan through RoadLoans.com will pay 11.99 percent, he says. That compares to national rates of 4 to 5 percent. Mortgage rates are lower, between 5 and 6 percent, but still higher than what a consumer with an excellent traditional credit history and FICO score would pay, he says. (Bankrate reports current national rates between 3 and 4.5 percent.)
You spend time, money and effort you could have put into building a traditional credit file. Building a traditional credit file is not difficult and it gives you access to a wide range of lenders and competitive interest rates, Ulzheimer says. He recommends secured credit cards and credit builder loans, which are small loans often offered by credit unions and secured by deposits, for building traditional credit.
“At the end of the day, whether you love them or hate them, you really do want to have a traditional credit report,” Ulzheimer says.