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 scores 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?