Alternative Credit Scoring: What Is It and How Does It Work?

26 million consumers in the United States are considered credit invisible. Another 19 million don't have enough credit to establish a traditional credit score.

Many of these consumers are millennials. Without a solid credit history, it can be impossible to qualify for loans and build a credit score.

Fortunately, there is a way out of this cycle. Keep reading to learn more about alternative credit scoring and how you can qualify for a loan without a traditional credit score.

What is Alternative Credit Scoring?

Alternative credit scoring is an increasingly popular way for lenders to asset credit risk.

Traditionally, borrowers have been evaluated based on a traditional credit scoring system that is heavily based on their credit history. Unfortunately, this method leaves out a significant portion of the population who don't have enough data to establish a traditional credit score.

Alternative credit scoring allows these borrowers access to loans and gives them a foot in the door to the credit system.  Alternative credit scoring looks at different data and more relevant factors to predict an applicant's credit risk. 

How Does Alternative Credit Scoring Work?

Traditional credit scoring relies heavily on FICO credit scores determined by credit rating agencies. Traditional scoring takes the following factors into consideration:

  • Current debt
  • Length of credit history
  • Payment history
  • Number of open accounts
  • Credit utilization ratio

Alternative credit scoring companies use different methods to evaluate potential risks when lending. Methods of alternative credit scoring include the use of data provided by the consumer. Even without a traditional credit score, consumers can take out loans thanks to alternative credit scoring.

Alternative credit scoring is usually based on the following:

  • Payments on bills (cell phone, utilities, cable, etc.)
  • Bank account balances
  • Shopping history and financial habits
  • Property records

These factors demonstrate financial stability as well as the willingness and ability to make payments on time. 

Benefits of Alternative Credit Scoring

With alternative credit scoring, consumers who would otherwise be unable to borrow money have a chance to grow financially.

Alternative credit scoring methods paint a clearer picture of a borrower's current financial situation and potential. Borrowers who are credit invisible, have made mistakes in their past, or simply haven't had the opportunity to build their credit have greater access to opportunities.

Certain groups who are commonly unbanked, such as millennials, can have the same financial opportunities as their parents. After you get approved for a loan using alternative credit scoring, you can start building your traditional credit score, giving you more opportunities down the line.

Alternative credit scoring allows lenders to offer consumers better deals by reducing loan origination costs and using automated underwriting methods. Those who already have loans can refinance to save money by using alternative lending scores. 

How You Can Benefit From Alternative Credit Scoring

For the large portion of the population that is held back by their lack of credit history, alternative credit scoring presents an opportunity to level the playing field.

If you are struggling to get ahead economically because of your credit score or lack thereof, you could benefit from alternative credit scoring.

Click here to create a free account to access your alternative credit score and unlock your potential today. 

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