Alternative credit, also known as nontraditional credit, is exactly what it sounds like: a different approach to credit. It's a powerful tool for business owners and operators, and it allows you to offer your services to underserved consumers without taking on additional risk.
To understand alternative credit, it's first necessary to explain traditional credit reporting. Traditional credit reporting is what most people think of when they hear about credit scores. The most common credit score model is FICO, which ranges from 300 to 850. These credit scores are usually calculated by the "Big 3" credit bureaus: Experian, TransUnion and Equifax. Your score is based on a few pieces of information, all involving your credit and financial history.
The big problem when it comes to traditional credit scores, including FICO, is that they aren't based on enough information. These credit reports only take into account four types of credit history:
Because it doesn't tell the whole story. Instead, these traditional credit report models take a limited amount of information and then present a score which is supposed to be definitive and comprehensive. The result is a report that is easily misleading, as it doesn't truly represent the individual's credit history, demonstrated financial responsibility or ability to pay back loans.
There are always many cases where people, through no faults of their own, are saddled with low credit scores. For example, most immigrants will find that their credit histories from their countries of origin aren't taken into account when they reach the U.S., even if they've built up excellent credit over the years. Similarly, millennials and other young consumers can be incredibly responsible financially, yet have low credit ratings just because they haven't had time to build up lengthy credit histories.
The other major problem with traditional credit is that it's easy for people to get effectively stuck with low credit scores. After all, if your traditional rating is low and the lender only considers that one score, then you may not be able to qualify for a personal loan, car loan, mortgage or even credit card. If that happens, then you can't build up and improve your credit. It's a catch-22, leaving many financially responsible consumers with hard-to-repair low credit scores.
So why is alternative credit better? Because it's more expansive and more accurate.
Alternative credit scores are based on a broader measure of the person's financial activity. In addition to credit card, personal loan, mortgage and car loan behavior, an alternative credit report will incorporate information like:
And more. Anyone who is responsible in paying off these obligations should be seen as a low-credit risk - and an alternative credit score actually reflects that reality by rewarding those consumers with higher ratings. Traditional credit, on the other hand, doesn't factor in those types of regular payments at all.
That means a business owner who looks at his or her consumers' alternative credit scores will be able to make more informed decisions than those who only look at traditional credit. Even better, with a policy of accepting alterative credit scores, you can open up your services to a huge, untapped market of low-risk consumers.
Not only will you be doing a good service, but you'll gain a major competitive advantage in the process.