Alternative Credit Scores
New credit calculations put credit within reach of all Americans
SAN MATEO, Calif., July 23, 2008 - With the credit crunch amplifying the importance of consumer credit scores, several companies are rolling out alternative credit scores, and Ethan Ewing, president of Bills.com, provides an overview of the scores and why they matter.
"Whether an individual wants to buy a house, purchase or lease a car, or even rent an apartment or get a job, the rate they pay, the terms of a financial agreement - or even whether they can achieve their goal - depends on one tool: the credit report," Ewing noted. "New alternative credit reports can help individuals receive fair credit terms -- whether or not they have traditional credit histories."
Understanding credit scores
Fair Isaac Corporation originally developed the FICO score method of rating consumers' credit histories. The three major credit reporting agencies - Equifax, Experian and TransUnion - each report consumer credit scores based on the FICO formula. The credit score is a number between 300 and 850 that measures an individual's creditworthiness based on credit history.
Scores are calculated using mathematical methods that incorporate credit history, amount of credit used and available, number of late and on-time payments, whether any payments due are in default, and other variables. The credit report lists specific accounts and financial history that go into the credit score.
As many as 50 million Americans do not have access to traditional credit scores, according to FICO. For these individuals, several companies are developing ways to measure alternative credit scores. These alternatives are based on bank records, rent payments, pay stubs and other sources:
- The Anthem Report and Anthem Score combine traditional credit bureau reporting with nontraditional information to provide as much data as possible on borrowers who have little traditional credit history.
- eFunds Corporation offers the Debit Report, which provides a composite of consumers' bank account histories, overdraft records, check order histories and accounts closed for abuse and fraud.
- The FICO Expansion Score is designed to predict the likelihood that a consumer will be delinquent in repaying credit within 24 months after obtaining credit. It uses non-traditional credit history such as bank account records, payday loan usage and payment plan information.
- The PRBC (Payment Reporting Builds Credit) credit score can take into account payments for services such as telephone and child care, so that people without credit histories can build credit based on their on-time payments. Individuals who pay a bill on time for six months can get this alternative credit score.
"Alternative credit scores can be a big help for those who have limited credit history," Ewing explained. They can apply to a variety of people; one example would be a retired couple who paid off their home long ago, pay for vehicles and living expenses from cash savings, and who want to refinance their home to buy a motor home. These customers, said Ewing, are unlikely to misuse their credit.
But some companies cite a concern that alternative credit scores risk "stretching" the credit pool to include people who can't afford it, perhaps extending the mortgage meltdown to other credit-dependent industries. Until more data is in, the primary government lenders -- Fannie Mae and Freddie Mac -- are not using alternative credit scores, but are observing them.
"While these scores are being evaluated, consumers should continue working to build credit in ways that benefit both traditional and non-traditional scores -- by living within their means, using credit wisely, and paying all bills on time," Ewing said.
Based in San Mateo, Calif., Bills.com (www.bills.com) is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. As the online portal to Freedom Financial Network, LLC, the company has served more than 40,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available at www.bills.com/news_releases.
In 2008, Entrepreneur Magazine ranked Bills.com as the No. 3 fastest-growing U.S. company on its Hot 100 list. Bills.com also was named a finalist as "most innovative company" in the American Business Awards in 2008. Company co-founders and co-CEOs Andrew Housser and Brad Stroh were named to the Silicon Valley/San Jose Business Journal's "40 Under 40" list in 2008, and are recipients of the Northern California Ernst & Young 2008 Entrepreneur of the Year Award.