What's in a credit score? An alternative credit score smells just as sweet

Do you know what's in your credit score? Not the number itself, or what makes it a good score, but the data used to calculate it? If you do, you have more insight than most Americans. If not, don't worry - the majority of your peers don't, either. 

Unfortunately, if you don't understand what goes into a credit score, you might assume yours is higher than it actually is. You could be a responsible consumer and make all of your payments on time, but none of those payments are being recorded by the big three credit agencies. As a result, you might be unable to build a credit history and could be more likely to be denied a loan or a rental unit.

What goes into my credit score?

Your credit score is also known as a FICO score, named so because it was created by the Fair Isaac Corporation. The organization is relatively quiet about the exact details that go into calculating a person's FICO score, but the math is broken into the following five categories:

  • Payment history.
  • Amount owed.
  • Length of credit history.
  • New credit.
  • Type of credit used.

The Consumer Financial Protection Bureau delved a bit further, highlighting these specific bits of data:

  • Unpaid debt.
  • Number of open credit lines.
  • Collections, foreclosures and bankruptcies
  • Certain aspects of your payment history.

That latter detail tends to confuse people the most. Your payment history factors the most into your score, accounting for approximately 35 percent. Theoretically, every on-time payment you make is evidence of your financial responsibility, no matter how small. Therefore, it's natural to assume that all these payments show up in your credit report. However, the FICO score only accounts for certain payments. Again, the specifics aren't clear, but myFICO noted they can include:

  • Mortgage loans.
  • Installment loans such as a car note. 
  • Credit cards.
  • Finance company accounts.
  • Retail accounts such as a department store credit card.
A person using one hand to type on a laptop and the other to hold a credit card.Credit card payments factor into your credit report.

The following are typically NOT included in a FICO score:

  • Rent.
  • Utilities payments.
  • Cell phone or internet bill.

What happens if I don't have the right type of credit?

"Twenty-six million Americans are credit invisible."

If you don't have a mortgage, a car loan, a credit card or other type of credit included in the FICO store, you're what's known as credit invisible. You're not alone; according to the CFPB, you share that title with approximately 26 million other Americans. What's more, another 19 million don't have enough credit history to be properly scored.

This can pose problems, as lenders rely on a credit score when deciding whether or not to extend credit. A high score indicates you're a responsible consumer and will make your payments on time, while a low score suggests you're a liability. No score at all is just as risky as a low one and could impact your ability to qualify for a mortgage, purchase a car, start a business or rent an apartment.

Thankfully, there is a way to get a credit score when you don't own a car or home. An alternative credit report factors in less-common data to supplement your thin or nonexistent credit. These reports use your rent, cell phone bill, utilities payments, short-term loans, bank activity and other financial information to assess your creditworthiness. The CFPB is a big advocate for alternative credit data, nothing that it can provide more up-to-date information, improve credit assessments with supplemental data and possibly reduce costs for lenders.

If you're one of America's millions of credit invisible consumers, you don't have to panic. An alternative credit score can prove your payment reliability to anyone who asks.

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