Alternative Credit Scores
For those with a “thin” credit file—fewer than six months of payment history on lines of credit like a credit card or car loan—or no credit history at all, trying to establishing a strong credit report can feel like a catch 22 situation: lenders want to see a long history of credit payments, but you can’t get a loan or line of credit to prove you can be responsible with payments without having that existing payment history. Yikes!
While there are ways around this situation—like becoming an authorized credit card user on a parent or spouse’s card or getting a secured credit card—another, relatively new option is to utilize an alternative credit score to showcase your creditworthiness.
How alternative credit scores work
The aim of alternative credit scores is to supplement the traditional credit model by offering a more complete picture of a prospective borrower’s creditworthiness. This financial inclusion can create a more accessible foundation for credit underwriting, providing millions of underbanked borrowers a chance to advance in the world. Alternative credit scores are able to include the underbanked because they’re based on non-credit payment history—namely recurring payments for cable, daycare, rent, insurance, internet, utilities, subscriptions, and cell phone service.
As with a traditional score, you’ll need to have consistent, on-time payments to receive a strong alternative credit score. So, it’s not a guaranteed better score, but it can help those who are responsible with the bills they’re already paying, even if they don’t have a credit card or other line of credit they’re paying on.
Who might want an alternative credit score
The underbanked in America—roughly 26 million people, or 10 percent of the population—stand to benefit the most from alternative credit scores. This includes immigrants, minorities, women, single parents, and even recent college and high school graduates who haven’t been introduced to the banking and credit systems by their parents.
Those struggling with damaged credit—whether through their own actions or because of the malicious actions of others—could also benefit from using an alternative credit score to provide lenders with more information about their creditworthiness.
PRBC — one alternative option
PRBC stands for Payment Reporting Builds Credit. They started in 2005 and are the largest non-traditional credit reporting agency. Enrolling with them is free, however there are verification fees for each account/bill you wish to attach to your PRBC account, like rent payments, utilities, etc. Each linked account/bill must have at least six months of payment history in order to count toward your score.
Although linking more accounts costs more money, it also gives a better alternative credit score. If you use any of PRBC’s bill-paying service partners, then your record of those payments will be kept automatically, and you won’t be charged a verification fee. When you receive and view your PRBC score, it won’t impact your traditional credit report.
There are similarities between traditional score reports and a PRBC score. The traditional scale used by the big credit reporting bureaus runs from 350 to 850, while the PRBC’s runs 100 to 850, but on both scales a 750 or above is considered excellent. Keeping these same benchmarks makes it easier for lenders and businesses, who are used to the traditional system, to understand and use.
A PRBC score uses the same criteria that traditional credit scores use, including putting more weight on recent data so that the impact of any negative marks will diminish over time. PRBC's Bill Payment Score (BPS) is weighted like this:
- Timeliness of payment: 25%
- Length of payment history: 20%
- Time since last late payment: 15%
- Severity of late payments: 10%
- Trade-lines (lines of credit)
- Type: 20%
- Number: 10%
Once you use your PRBC score to get a line of credit at a retailer or lender, then your payments will be reported to the traditional credit bureaus to build up your traditional score.
In addition to companies like PRBC, the top traditional bureaus are also developing more inclusive ways to judge a person’s creditworthiness and start them on the path to a traditional credit score using alternative data—the FICO Score XD, is one example.
Why you should still aim to improve your traditional credit
While alternative credit scoring systems can be very helpful, they are best used as a stepping stone to acquiring a traditional credit score. Relying exclusively on an alternative score still excludes you from the full purchasing power and potential that a strong traditional score brings.
If you decide to use an alternative credit service, be sure the company is legitimate and is securely handling and storing your banking and payment information. You don’t want your financial details or identity stolen and potentially harmed before you get a chance to build up your credit report!