Millions of Americans may have learned over the last several years that it's important to maintain a good credit score, and that this can be closely linked to also having healthy overall finances. However, many might have also heard of the concept of alternative credit scores, and wondered what was so different about these ratings, and what that could mean for them going forward.
The important thing to understand about alternative credit scores is what actually makes them alternative in the first place. To that end, it must be understood that traditional credit scores only consider how a person has handled their credit, specifically. The idea behind this is that a traditional rating is designed to determine how likely a person is or is not to pay credit-related bills each month and not fall behind. However, experts have long pointed out that this method of evaluating a person's financial wherewithal is incomplete, and perhaps even unfair, because it does not consider their overall financial picture, only a small part of it.
So what's different?
Therefore, when it comes to alternative credit scores, consumer advocates say that they're far more comprehensive because of how they examine all aspects of a person's ability to pay bills. That means that they look at not just how a person handles debts like those related to credit cards, student loans, auto loans, and the like, but also how they handle other and perhaps more necessary monthly payments.
That could, for example, include how a person has been able to keep up with paying his or her rent each month, or utility bills, cellphone bills, cable bills, and so on. The idea here is that even if a person does not have credit in their name, they may be able to build a significant demonstrated history of paying their bills every month.
An additional benefit
This kind of alternative credit scoring could be particularly helpful when it comes to helping to get people with thin or non-existent credit files counted by businesses that use credit to evaluate financial wherewithal. There are roughly 40 million such Americans these days, meaning that they may be locked out of being able to access things like certain types of services, or even job opportunities, because many businesses only consider traditional credit standing. Indeed, studies show that a majority of employers these days actually ask job applicants to provide credit history data; several states outlaw the practice, but many more do not, and that can create a difficult environment particularly for people with little to no credit history at all.
Fortunately, consumers can self-report alternative data to the companies behind these scores, such as PRBC, to ensure that their positive payment history is correctly accounted for. In addition, any businesses that consider credit when making decisions must, under the law, consider alternative data when it is presented to them. In that way, alternative scores can unlock situations that many consumers may not have even been able to consider before, and therefore empower them to significantly improve their lives in relatively short order.