Alternative Credit Scores

What are Alternative Credit Scores + Why Should We Pay Attention to Them?

Currently the dominant credit scoring company is FICO. Their data is used by most businesses that need credit information to evaluate risk. Most people are familiar with how FICO’s system works and we have a basic idea of what activity will lead to a good, fair, or poor score. FICO has revealed the main factors that build a credit score, but the exact algorithm is a trade secret. Alternative scoring companies like PRBC, use a different set of data to build credit score numbers. These alternative credit score companies aren’t in popular use like FICO, but they are still important to pay attention to. They can give us an idea about what data FICO (or the new market leader) may use to calculate scores in the future.

Certain types of bills like mobile phones, utilities, and rent are not used in FICO’s credit score (as far as we know). But this could change in the future. New technology like the ability to pay for anything via your mobile phone, could alter this. Many large companies like Paypal and Google are seeking to make mobile phone payments replace the credit card. They see cell phones as a complete replacement for your wallet, with the ability to pay for all type of goods with NFC (near field communication) chips. If this technology comes into popular use, credit scoring factors will have to change. For this reason it is important to watch what data these companies are using, so we can understand what scoring factors may be added or changed.

What Factors Do Alternative Credit Scores Companies Use?

Access to credit is often much lower in poor communities than with rich ones. Low income individuals may have a great history of paying their bills and rent on time, but may not have much of a credit history. Certain companies like The Anthem Report, eFunds Corporation, and PRBC create a score that is based off of factors like rent payments, mobile phone payments, bank statements, and pay stubs. These records can help companies fairly evaluate an individual that does not have an adequate credit history. In the near future, mobile phone payments and the “digital wallet” have the ability replace the credit card. If this happens, these non-traditional factors may come into play in all of our scores.

Declining Credit Card Usage + Increasing Debit Card Usage

Currently most businesses are not making use of this alternative credit data, but seem to be interested in it. Some experts believe that sooner or later this information will be used more as traditional credit cards usage declines. Debit card use is up by a large percentage on the other hand. Debit cards are a much safer alternative to credit, as they only deduct funds that are available.

Credit cards are an unnecessary remnant of the 1950s. By using credit cards, we are essentially borrowing money every month, when we don’t need to. If we don’t pay this money back on time, we get charged 10%-20% interest. Most people don’t need to use credit, but do it out of habit. Other than the fact that credit cards build credit history, there is really no point for many people to use credit in the first place. Some financial experts believe that as new payment methods like the “digital wallet” come online, people might realize that credit cards are mostly unnecessary.

What are your thoughts on alternative credit scores and new (improved?) systems that track credit?


12 comments to Alternative Credit Scores

  • I’ve been watching the development of non-traditional credit scoring for a while. I think it has at least as much likelihood of harming people of modest means as helping them.

    For example, some mortgage lenders will make loans to first home buyers without a score. They look at cancelled rent checks, letters from utility companies etc. Why do we need to collect more information so credit bureaus can sell another product when mortgage underwriting, for example, can happen without it?

    The bottom line is that big lenders will eventually accept the alternative credit score to save them money. And credit bureaus will collect more info because they’ll have more to sell.

    Neither of those is likely to benefit the borrower.

  • The way credit scores in Canada are tracked differs from that of the USA. Usually it is just the bank and credit accounts that you have that are reported. The odd company may report too but it isn’t as common. For example. my cell phone company reports to the bureau but they are the only provider in my area that does. Figure that one out.

    • In Canada the companies report you to collection agencies. Once that happens your rating is affected. So in a way, the company is adversely affecting your score. But if you’re not paying your bills, what can you expect?

  • Tiffany

    I will say that the use of NFC sounds like the way we will be going in the future. I dont really see the purpose of credit cards and think that car payment and mortgages just be top factors. Like you mention I lot of people on get in trouble with CC in the first place. If you don’t have the cash dont get it.

  • I’d never really heard about alternative scores before reading this post. I’m thankful even more now that we always make our payments on time. Personally, I don’t want some digital payment method, I like the way things are. Hopefully nobody will move my cheese. :-)

  • Andrea

    I had never heard of alternative credit scores before this post, though I did know about manual underwriting for mortgages. (which I think is a GREAT thing) I think it’s a good thing, a credit-score shouldn’t be the be-all and end-all. I look forward to seeing more options in the future.

  • Market Maker

    This is interesting. I didn’t realize that phone bills didn’t count toward your FICO. That’s not fair!

    • Technically, they DO count. Maintaining a positive credit history (e.g. not being sent to collections) increases your score over time while being sent to a credit agency will greatly affect your score in a negative way.

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