Alternative Data For Credit Scores

While unpaid utilities, rent and cellphone bills that are sent to collections will have a negative impact on your credit scores, the positive payment activity is not factored into most scoring models.  This is where Alternative Data for Credit Scores comes in to help!

Mortgage Lenders have not been quick to accept these new data sets, but you can have them added to your report.  It’s a manual process at this point, but there are some good reasons you might want to do the work.

If you can show the ability to pay important items such as rent, and phone bills (for instance) along with successfully managing your money (read back statements don’t show bounced checks every few weeks) – that shows another layer of fiscal responsibility.

The fact that these payments can be verified by legitimate business sources like a utility company, or mobile service provider means there’s no reason to discount the accuracy.

More than 45 million U.S. consumers’ lack a credit report or have too little information to generate a credit score! Using Alternative Data for Credit Scores could be the key to opening up mortgage loan programs to Millennials!

42% of consumers believe they are a better borrower than their credit score represents.

61% of consumers believe that adding payment history would have a positive impact on their credit score.

Top financial information consumers are normally willing to share when applying for a home/auto loan:

1. Utility bill payment history — 58%
2. Paycheck stubs — 56%
3. Checking/Savings transactions — 48%

Alternative data for credit scores is anything beyond your traditional credit data:

• Loan and inquiry data on credit cards,
• Car loans and leases,
• Student loans,
• Mortgage loans,
• Personal Loans typically with a term of 12 months or greater.

“Alternative data for credit scores is set apart in that it’s Fair Credit Reporting Act–compliant in its usage; that means it’s displayable, disputable and correctable by the consumer.”

Alternative Financial Services (AFS) data:
Includes loan types such as online and storefront, short-term unsecured, non-prime installment, auto, rent to own, and buy here pay here.  These types of credit providers often provide real-time data.

We don’t normally see this type of creditor giving us past credit information (meaning your account is paid off) but that could easily happen when we are adding alternative data for credit scores.

Full-file public records data:
Goes beyond basic reportable data in the traditional file. If you provide the credit bureaus with additional information – they are going to make it part of your complete and permanent credit file.

These types of items could include: property and asset information, address stability, education, identity verification, risk factors, and professional licensure at the state and local levels.

Consumer-permissioned account data:
With this type of alternative credit for credit scores, you are really giving the credit bureau permission to check your bank records.

This is something that can make a mortgage process easier (although we would never transmit the data to the credit bureau) – but if you provide any 3rd party with access to your accounts, be sure to change your password as soon as they have access to what they need!

This level of permission gives the bureaus real-time access of your bank data at the
transaction level. 

Rental Data:
Rental Data, as alternative credit for credit scores, means the bureaus are collecting payment information from property managers, rental collections agencies, payment processors that includes lease terms, on-time payments and late payments.

“Research into alternative data shows that it can bring significant benefits to individuals’ credit scores. A study released by the New York City comptroller’s office in 2017 using Experian data found that about 28.7% of a sample population studied gained a credit score for the first time using data about their rental histories, with the average new score at 700 points.”

If you are a millennial with little to no credit – or someone who has lived on a cash economy like Financial Peace University teaches (we did that for about 5 years to get things balanced out) – you might not have a credit score.

While some companies don’t have a mortgage option for folks with zero recent credit – we do!  We need 3 forms of alternative data for credit scores.  We’ve used insurance payments, cell phone, Xbox Live, Netflix, Hulu – if you are paying a bill on time each month (Spotify premium) we can count it.  We need a 12 month history of the payment.  You’ll likely need a 3.5% down payment– and that money can be a gift.

But not all credit is created equal… while some kinds of alternative data could help you get access to good credit, others might be considered too risky for mainstream, mortgage loan credit.  An example of this would be a landlord that is mad about the way you broke a lease, and refuses to say you made payments on time.  So be thoughtful about the information you are turning over.

“Today, as lenders have the ability to collect more data than ever about their clients and prospects, they are continually finding ways to automate and scale. In the credit decision process, financial institutions are using artificial intelligence (AI) and machine learning (ML) solutions to make smarter and more precise decisions.”

If you have questions about improving your credit score, or using Alternative data for credit scores – call Steve Thorne, Mortgage Loan Expert 919-649-5058.  Honest answers – isn’t that what you really want?