Your credit report can make or break your ability to get an affordable loan or even an apartment. So what if your credit report is a blank slate? Alternative credit reporting companies claim to have a solution.
As many 50 million U.S. adults don't have a traditional credit history, or have a credit file that is too “thin” to give them a good credit score, according to FICO. Because traditional credit reporting focuses on tracking credit usage to predict how likely a person will be to pay back a future loan, consumers who don't use credit (perhaps because they avoid credit cards or don't own a home) fall through the cracks.
This hole in the credit reporting industry is giving birth to a growing number of alternative credit scoring companies. Consumers who don't use credit still make regular payments to landlords, utility companies and phone companies. The focus of alternative credit reporting companies is to let these consumers create records of their payment history on these other recurring payments.
Examples of alternative credit scoring companies include eCredable and the PRBC Alternative Credit Score. The companies provide web-based tracking services that enable consumers to create a record of responsible payment behaviors overlooked by traditional credit bureaus. You enter the bills you'd like to appear on your report (rent payments, utility payments, etc.), and the company compiles them to be assembled into a credit report.
“Consumers have the right to make every payment count when they request credit from a lender, and now we've given them the power to make exercising that right easier,” said Steve Ely, CEO of eCredable and former president of Equifax Personal Information Solutions, in a press release. “Our services automate the age old process of producing paper documents to demonstrate you pay your bills on time — the ones that don't go into the national credit bureaus.”
So, what's the catch? Well, whereas regular credit reporting won't cost you a penny, alternative credit reporting sometimes comes at a cost.
If you want to actually show a creditor the credit report produced, you may have to pay a fee. That's because, before you present a report to a lender, you must have all payments verified by a reporting professional. eCredable charges $30 per bill to verify rent payments and $20 for other types of bill payment accounts. That means, if you want to verify multiple bills on a single report, you could end up paying $70 to $90. However, Ely says, you may be able to get out of the fees by having the lender foot the bill — simply ask the lender before you apply. PRBC, meanwhile, charges lenders for its reports.
Once your payments have been verified (which takes three to five business days), you can print a physical copy of your report to attach to your credit application or authorize certain lenders to log on to the site and view your report via a temporary password. However, verifications are good for only 45 days before you have to start over.
Many consumers might find any price worth paying for the benefits of building a credit report, which can save substantial dollars in interest costs down the road — assuming, of course, that lenders actually look at your alternative credit report. The Equal Credit Opportunity Act requires creditors that check credit reports to consider information not reported to the credit bureaus, if an applicant requests that they do so — and if that information meets certain standards. eCredable maintains its reports fall under that umbrella.
Yet skeptics voice concern that banks may not really care much about alternative credit reports and will prefer the reliability of true-and-tried credit scoring systems.
“It's a great idea, and it's certainly admirable,” says Mike Sullivan, director of education for credit counseling agency Take Charge America. “Unfortunately, it's unlikely that a lender would give credibility to a credit score that doesn't have the same track record of statistical significance as regular credit scores, particularly FICO scores. It's not yet known whether it's as predictive as the old path of established, real credit, so it won't have the same impact in lenders' minds.”
Companies like eCredable attempt to break through this objection by establishing direct relations with lenders that will honor its proprietary credit scoring system, AMP Credit Reporting. Liaisons so far include mortgage companies such as Churchill Mortgage and auto lenders like RoadLoans.com.
Still, says Sullivan, the alternative credit score won't carry much weight until a record of reliability has been established.
“And that will take a long time. In the meantime, I tell consumers, just wait on the sidelines and make efforts to build your credit,” Sullivan says.
And that might not be as hard as it seems. More than half of the information on the average credit report consists of credit card history, according to a Dec. 2012 probe into the credit reporting industry by the Consumer Financial Protection Bureau. As a result, credit cards — in particular those issued by big banks, which account for the majority of credit reporting — can play an inordinate role, for good and bad, in shaping your credit history.
In short, the most rapid path to improving your credit report may simply be to take out one or two credit cards. For the credit challenged, a store credit card or a secured credit card may be accessible options. To build credit, Sullivan recommends, simply use the card once or twice each month and pay the bill off in full at the end of the month. You might just find that it's cheaper and easier than going through the cumbersome process of having your monthly bill payments tracked via a separate service.