Alternative Credit Bureaus
By some estimates, there are 50 to 70 million people in the United States who do not have credit cards or a credit history in their own name, such as many young adults, immigrants, and divorced or widowed women. Alternative credit bureaus have sprung up to help these so-called unbanked or thin-file customers to get credit.
Alternative credit bureaus are companies that determine the creditworthiness of individuals by using data other than credit reports. Some of these companies include:
- Pay Rent, Build Credit (PRBC)
- First American Credco
The creditworthiness of applicants for loans is determined by their record of paying everyday bills, such as:
- cell phone
- gas and electric
Alternative credit bureaus also calculate credit scores using their own financial models based on the bill-paying information. These alternative credit scores use the same data and criteria that traditional credit scores use, but simply apply it to non-credit-reporting bills. And as with traditional credit scores, more weight is placed on more recent data, so the negative impact of any blemishes will diminish in time. For example, PRBC's Bill Payment Score (BPS) is weighted thus:
- Timeliness: 25%
- Length of Payment History: 20%
- Time Since Last Late Payment: 15%
- Severity of Late Payments: 10%
- Type: 20%
- Number: 10%
Some alternative credit bureaus, such as PRBC, require that the borrower apply to develop a credit record and others, such as LexisNexis, collect the information from public records. For instance, to build a credit record with PRBC, you enroll at their website, enter your account information for the bills that you pay regularly, then request verification. Enrolling is free, but verification costs $20 to verify rent payments, and $15 for each account that has at least 6 months of payment history that you want verified. You will then be required to fax or mail your documents to PRBC. Although more accounts costs more money, it also gives a better history and a better alternative credit score. (Almost all credit scores give a greater weight to more history, since this provides more information.) PRBC also has partnerships with bill-paying services, such as CheckFree. If you use their bill-paying service, then your record of paying bills will be kept automatically.
The main problem with alternative credit bureaus and alternative credit scores for lenders is that they are not well tested against a large sample of the population over a long time period that would allow an accurate assessment as to how well they will predict the actual creditworthiness of borrowers. The FICO score, which is used by most lenders, has been well tested over several decades, and so lenders feel much more confident using the FICO score. Nonetheless, a good bill-paying record is certainly indicative of good creditworthiness, and since the same behavioral patterns that are being used to judge paying bills is the same as the FICO uses for paying debt, there is little reason to think that they would not be a good measure of one's creditworthiness. Of course, people have to pay bills or their service gets cut off, so certainly there is a greater incentive to pay bills than to pay debt, but bill paying still shows that the bill payers can handle and manage money, at least to some extent. However, borrowers without a traditional credit score will still have a harder time getting credit and will pay higher interest rates, since there is no debt-paying information.
Not every lender uses credit scores or credit reports to make lending decisions; some lenders base their decisions over the information that they collect themselves, such as verifying employment, assets, and other financial information. So if you have a good, steady job, and have lived in the same place for a couple of years and you don't have any credit blemishes, then you should be able to get, with some diligence, a loan on relatively good terms.
Specialty Consumer Reports — ChexSystems
Credit reports have information regarding payment history and amount of debt, and is requested by potential lenders before lending money. However, there are many other types of reports that cover gambling, checking accounts, employment, insurance, medical information, rental information, and mortgage financing. ChexSystems is one of the specialty consumer reporting agencies covering how people manage their bank accounts. ChexSystems relationship with banks is the same that lenders have with credit reporting agencies. Banks get these reports on anyone opening a new bank account, but they also send information about current customers, to add to the database.
The ChexSystems Consumer Website allows you to check your report at ChexSystems, if they have a report on you. However, they do not display the information online. You have to call, and provide the information to their automated voice system, then they mail your report in about 5 days. The site has a sample report that details what is covered.
The ChexSystems Consumer Report may include any debts owed to a bank, writing checks without sufficient funds, and returned items. Major sections include:
- Reported Information includes any mishandling of accounts, such as bounced checks, unpaid debts, or returned items. This information is kept for 5 years.
- Inquiries Initiated By Consumer Action includes completing any applications to open a bank account, or applying for a credit card or a loan. Also included are any inquiries that you make to receive your own report. This information is available anywhere from 90 days to 3 years.
- Inquiries Not Initiated By Consumer Action are inquiries that have not been initiated by you, but by a member of ChexSystems service with a permissible purpose, such as your current creditors or bankers, creditors looking for pre-approval candidates, and potential investors. Like credit inquiries in credit reports, this activity is only reported to you, not to others.
- Retail Information includes accounts with returned checks or certain collection accounts. However, ChexSystems gets this information from the Shared Check Authorization Network (SCAN), who, in turn, gets this information from retailers and other businesses. (SCAN: Attention Research & Resolution, 7805 Hudson Road, Suite 100, Woodbury, MN 55125, 800-262-7771)
- History of Checks Ordered is a record of check orders placed within the last 3 years.
- Social Security Number Validation validates the number by specifying the year and state that the sequence of digits first became available.
- Drivers License Number Validation compares the number with the requirements of the issuing state.
- Drivers License Number Verification is provided by some states to ChexSystems that shows the name and date of birth of the person to whom the license was issued.