By PAMELA YIP / The Dallas Morning News
The idea of judging borrowers by more than just how they handle credit cards or car loans is gaining traction.
The lending industry calls it alternative credit scoring, or "full-file credit reporting." If you’ve never had a traditional credit card, a personal loan or a car loan, lenders can study your history of rent payments, utility bills, insurance premiums and cellphone payments to determine if you’re a good credit risk.
The idea has been around for a few years. But lenders have been slow to adopt the practice without knowing how effective such alternative information is in predicting someone’s creditworthiness.
Recently, the Brookings Institution Urban Markets Initiative released a report that put some numbers on alternative credit scoring. The report, which used anonymous data on 8 million people from the credit bureau TransUnion, is expected to encourage lenders to use alternative information.
"Alternative data, if widely incorporated into credit reporting, can bridge the information gap on financial risk for millions of Americans," according to the study by the Washington-based liberal think tank. "Considering that many of these millions outside the credit mainstream are poorer, less-advantaged Americans, the information can direct markets toward a faster alleviation of poverty in this country."
In essence, the use of nontraditional data makes extending credit easier for lenders, by giving them more information to work with.
Increasing the rate
"Including energy utility data in all consumer credit reports increases the acceptance rate by 10 percent, and including telecommunications data increases the acceptance rate by 9 percent," the study said.
If you think about it, it makes sense. Just because someone hasn’t used traditional credit doesn’t mean he or she is a bigger risk for paying off a loan. In fact, it could mean that the person is simply more careful with money.
"All it is is a way to help manage risk," said Alyssa Stewart Lee, co-author of the Brookings study. "It’s about saying, in the past has this person paid on time, and will they in the future?"
The message for consumers is, if you ever think you’ll want to take out a loan, it matters whether you pay your power and cellphone bills on time.
In 2004, Fair Isaac Corp., which produces the widely used FICO credit scores, created the FICO Expansion score, which takes into account a consumer’s nontraditional payment history.
"Lenders are finding that a significant portion of this population are excellent credit risks," said Craig Watts, Fair Isaac spokesman.
"By using the FICO Expansion score for these consumers – who include recent immigrants and young adults – businesses can make more financial services available to more people who have missed out on opportunities simply because they lack a traditional credit history."
Besides utility and telecommunications payments, the expansion score looks at things such as:
•How you’ve handled your checking account. Have you tapped your overdraft protection regularly? It’s OK once in a while, but if there’s a pattern, it means you’re spending more than you have in your checking account, and that can eventually hurt your credit.
•Whether you’ve made timely payments on things such as furniture layaway plans and memberships at book-of-the-month or record clubs.
TransUnion officials said the Brookings study reaffirms the benefits of using nontraditional data for certain segments of the population.
"The study’s results continues to validate TransUnion’s position on the many benefits full-file credit reporting provides," said Chet Wiermanski, vice president of analytics.
"Including this type of data could allow the credit industry to offer credit to a broader and more diverse set of consumers who traditionally may have been overlooked by the conventional risk assessment tools deployed today."
More mortgage lenders say they’re using alternative data to evaluate mortgage prospects.
"We’ll use insurance payments, utilities, cellphones, club memberships – anything that we can find that’s got a monthly payment on it that we can get a reference on," said Craig Jarrell, president of the Dallas Mortgage Bankers Association. "We’re more than happy to use alternative credit."