Disclosure regarding our editorial content standards.
Your credit impacts you in many different ways. When you want to get a mortgage or a rental agreement, lease a car or even open up a bank account, your credit will be checked. If you have little credit history or a low credit score, you’ll find yourself being denied some of these services or offered them at incredibly high interest rates. You might even fail a job screening!
When you don’t have a credit profile, it can be challenging to start building it out. Luckily, that is where alternative credit data can come into play.
Alternative credit data is a broad term that refers to all the credit data currently not reported on traditional credit reports. Used correctly, this type of additional credit data can strengthen the credit profile of someone who’s lacking in traditional credit data. Some examples of alternative credit data include rental payments, utility payments and full-file public records (to name a few).
How does credit reporting work?
Individuals aren’t born with a credit report. You won’t have a credit report until you apply for some type of credit account or are added to an existing account by another user. When you’re approved for a credit account, the details of that account will be reported to the three major credit bureaus: Equifax, TransUnion and Experian.
It will take six months of credit history before you’re eligible to have a credit score attached to your profile. From the moment it’s opened, your credit report will continue to pull history on any eligible credit accounts, such as:
Many people have gotten by on paying cash for everything. These people may have no credit report or might be in the beginning stages, where they’ve signed up for their first account but still don’t have enough credit history to have a credit score. The credit bureaus determine these people to be “credit invisible” or have “thin credit.”
The Consumer Financial Protection Bureau released a report stating that as of 2015, 11 percent of the U.S. adult population has a thin or stale score. That’s 26 million people who don’t have enough credit history to establish a FICO credit score. For these people, lenders have no way of telling if they’re responsible or risky borrowers.
The default assumption is that these people are risky, and lenders give them high interest rates or poor borrowing terms or deny their applications altogether.
What are forms of alternative credit data?
At the end of the day, lenders don’t want to keep millions of Americans from accessing the financial products they may need. Some of these people have purposely avoided credit products (possibly to avoid overspending) and shouldn’t be punished for their choices to date.
As a result, alternative credit data has become a way for lenders to evaluate those with a thin credit file.
Alternative credit data helps people who can’t benefit from traditional credit reporting methods. Lenders will now consider evaluating other forms of credit information, such as utility bills, bank accounts, rental payments, asset ownership and full-file public records.
Just because a person has waited a long time to open a credit account doesn’t mean there isn’t a record of their creditworthiness. These other forms of credit data can still speak to a person’s financial behaviors and patterns, in a somewhat roundabout way. For example, an individual who’s never missed a payment or made a late payment on their rent or utility bills is likely a trustworthy candidate.
Similarly, if an individual makes late payments on their utilities frequently, it can be assumed they will do the same for other financial products.
Understanding UltraFICO and Experian Boost
The traditional credit bureaus want to consider alternative credit data, but there are still many barriers when it comes to using this type of credit data. First, many individuals may have been paying rent for years and years, but that information isn’t easily accessible. That’s because many landlords don’t report this information and have no incentive to do so.
There is also the issue of deciding how important this new alternative credit data is when it comes to a person’s credit score. The credit bureaus have been reporting credit scores based on traditional credit data for decades now. Anyone can look up and understand how much factors like credit utilization or payment history play into your credit score. The same can’t be said for alternative credit data.
Luckily, to address this gap, FICO and Experian have both introduced solutions that incorporate alternative credit data.
UltraFICO
FICO released a new scoring method, called UltraFico, that includes alternative credit data. As described by FICO, the UltraFICO Score “enhances your credit score based on indicators of responsible financial behavior.”
UltraFico is a voluntary service that lets consumers opt in for alternative credit data to be included in their report. This process is free and permits FICO to review your checking and savings account information.
When looking through your account information, FICO will assess if there’s relevant data that shows you’re a responsible consumer. Some of the factors that FICO looks for are:
- A decent amount of savings and a healthy average balance in your accounts
- No history of negative balances
- A long account history with the bank
- Regular payments of bills
- A history of having cash on hand most of the time
According to FICO, 7 out of 10 people in the U.S. who have kept positive balances on their accounts and have had consistent cash on hand for several months can achieve an UltraFICO score that’s higher than their traditional FICO score.
It’s important to note that an UltraFICO score will only help you if you’re applying for financial products with a participating lender that considers UltraFICO scores. UltraFICO is also limited to FICO Score 8 and FICO Score 9. So, if you go to a lender that’s pulling older versions of FICO Scores, your UltraFICO score won’t show up.
Remember, you would be giving FICO access to your bank accounts, so you wouldn’t be able to hide mistakes like recent late or missed payments. If you’re worried about this, you might want to spend a few months focusing on improving your accounts and applying for UltraFICO at a later date.
Experian Boost
In response to FICO’s UltraFICO scoring, Experian decided to release Experian Boost. This new free service allows consumers to opt into including specific utility and telecom bills in their credit report. Before, consumers only saw their mobile payments or utility payments on their credit report if they missed a payment. Now, Experian Boost allows consumers to add all the data about on-time and consistent payments to their profile.
Experian Boost allows you to add accounts such as:
- Netflix
- Cell phone bills
- Cable television
- Natural gas bills
- Electric bills
- Water bills
Experian Boost promises consumers they’ll see immediate results. Individuals simply need to link the account to their profile, confirm the account that’s chosen and see the data immediately get pulled in.
Experian Boost works with any Experian-based credit score, so the lender doesn’t have to do anything extra. If they already use Experian to check consumer credit scores, they’ll see your Experian Boost-updated score.
There are many ways to build credit
Building credit can take time, but it’s definitely worth the effort. Ultimately, how you build your credit is up to you, as there are many approaches. If you need a boost in your credit score immediately, alternative credit data may be a good option.
If you have more time, there are other ways to boost your credit. It may take a bit longer, but you can increase your credit through traditional tactics such as using credit cards responsibly, opening other accounts as appropriate and lowering your credit utilization ratio. This approach’s benefit is that you won’t be reliant on a lender using UltraFICO and you won’t need to give Experian your account info.
Instead, you’ll build responsible financial habits and see the reward with an increasing credit score.
Both options are valid, but either way, commit to making your credit score a priority today. If you need any help with this, consider working with the credit advisors at CreditRepair.com.
