Credit history check is one of the steps in a traditional lending process. And it is universally known than poor credit leaves you with fewer chances for approval, while good credit makes you all the more attractive customer for any lender.
Sadly as it is, nowadays all the more potential borrowers refer to the former group – they either have poor credit history, or none at all. The existing scoring system is not perfect and it leaves a lot of people behind.
Thus, the government is now making an attempt at finding a way to improve the situation and provide more customers with a loan opportunity they haven’t been eligible for before.
Earlier this spring the Consumer Financial Protection Bureau has made a new proposal that involves using “alternative data” as basis for credit score calculations.
Under the term of “alternative data” is meant the information that traditionally isn’t included into a person’s credit report. Among other it includes:
- Cell phone payments,
- Rent payments,
- Cable TV payments,
- Other related bank account information,
It is also discussed that some other types of alternative data (not directly related to a person’s financial situation) might also be taken into consideration in the process of credit score formulation (e.g. occupation, education).
At the present moment the bureau encourages both customers and loan industry workers to send their comments on the subject.
Credit scores are also known as FICO scores at the consumer financial market. Strictly speaking, they represent your level of creditworthiness in the eyes of a lender. They are three-digit scores that are calculated with the help of a mathematical formula with the highest score of 850 and a minimal score of 350. However, in the present-day financial situation even 600 score is not always sufficient for many lenders.
Credit scores are calculated by three major bureaus — Equifax, Experian and TransUnion. They also create and keep your credit record with all the major financial information.
One of the things with this system is that it takes into consideration only financial side at large (mortgage payments, credit card repayment history and so on) and it also keeps track of all the “problems”. As a result, a great number of consumers end up with either no credit history, or it is so bad, not one lender will consider it.
It is hard to create a good score, especially when you’ve never owned a credit card. In this respect, having more versatile information at hand is beneficial – a traditional credit score can be improved with some extra bonus added from another sector. This is an alternative way for a consumer to demonstrate and prove their creditworthiness for a lender.
In this respect, some of the credit companies have already started putting these ideas into practice:
- FICO Score XD has been recently introduced by Fair Isaac (FICO creator). The new system will take into consideration such alternative data as cellphone and cable payments as well as property records.
- CreditVision Link – a new scoring model that takes alternative data into consideration was also worked out by TransUnion. Apart from traditional financial data the new model creates a score also based on the checking account histories and home address permanence.
- Besides, about 100 companies are now in the process of testing the new model.
The Consumer Financial Protection Bureau makes an effort at making lending more affordable to everyone and the entire process all the more responsible.
If you have any inquiries about credit scores, here are some useful resources:
- Free copy of your credit report can be obtained once a year from the three aforementioned credit bureaus at annualcreditreport.com.
- You can also request your credit score information from your credit card company and your lender as many of them now can grant free access to scores (for a month).
- If you are willing to comment on the CFPB proposal, you can make it online at regulations.gov till May 19.
- If you want to read more information on the subject, make a request with the bureau