A rise in the use of alternative credit scores typically comes in conjunction with a well-timed jump in mortgage availability, according to research from the Mortgage Bankers Association. These scores help lenders better assist those whose traditional credit score may not fully reflect their financial responsibility.
Alternative credit scores usually touch upon three previously unrecognized criteria in order to develop a fuller credit score that more accurately reflects the borrower. Rent payments, utility payments and public records are all included, according to Bankrate. Scores such as Payment Reporting Builds Credit (PRBC) take into account even more, such as memberships, online services, cell phone bills, prepaid cards and more.
"Adding nontraditional data can increase a lender's approval rate by 5 to 15 percent," said Ankush Tewari, director of strategy and market planning at LexisNexis. "They can book more creditworthy consumers and not make offers that are too risky."
The inclusion of so many factors makes alternative credit scores such as PRBC a helpful tool to those who may have thin credit profiles, such as recent graduates, immigrants, older people with long-retired debts and those who manage their finances by checking or cash. These people may be making every payment they have on time, but if those transactions are unrecognized by traditional credit scores, then it won't be doing them much good. According to Tewari, about 50 million people have slim credit scores that don't precisely reflect their habits.
Additionally, alternative credit scores are useful for those with middling scores who do qualify for loans, but receive unsuitable interest rates.
"It refines the rank ordering of people in lower credit bands, so some are promoted up," says Eric Lindeen, director of marketing at Zoot Enterprises.
Bankrate reports that in 2011 1.5 percent of the 200 million people with FICO credit scores were considered "rising stars." This means that their traditional credit score had risen 100 points in the previous four and a half years. These are people who lenders want to find, and alternative credit scores go a long way toward making that happen.
These scores will confirm to lenders that this segment of people are trusty-worthy. These consumers are good people ready and willing to pay back their debts on time who deserve more consideration than a traditional credit score implies.
The proliferation of alternative credit scores into the market can be a boon to those 50 million who feel they deserve to be more correctly represented by their credit score.
"Lenders want to lend to those folks again without breaking their portfolios," said Patrick Reemts, director of credit risk solutions at ID Analytics. "And they want to do it in a way that's safe and very consumer-friendly."