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.
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 trouble with traditional credit.
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. People who don’t have that history aren’t well represented.
Why is this a problem?
In short, traditional credit reporting doesn't tell the whole story. Instead, it takes a limited amount of information and presents a score which is supposed to be definitive and comprehensive. The result is a conclusion that can be misleading. It doesn't fully represent an individual's credit history, demonstrated financial responsibility or ability to pay back loans.
There are many cases where people, through no faults of their own, are saddled with low credit scores. For example:
The credit histories of immigrants don’t follow them from their countries of origin. So they aren’t taken into account here in the U.S., even if a person has built up excellent credit over the years.
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.
Businesses Get Big Benefits When They Accept PRBC Alternative Credit Reports.
Making the Invisible, Visible.
About 11 percent of U.S. adults are credit invisible. In addition, 19 million have “unscorable" credit records, meaning there's not enough information available to assess their creditworthiness. Many of these people may be financially disciplined, but traditional credit bureaus provide little to no insight because of the limited data they collect.
Suppose someone doesn't own a credit card, but pays their rent, utilities and phone bills on time and in full every month. If you knew this, you'd be more likely to see that customer as fiscally responsible. Alternative credit reports make this possible.
Getting the Customers Others Miss
Though alternative credit scores are gaining popularity, many companies still don’t use them. This is potential edge over your competitors. While they use traditional credit only, and turn away thousands of unbanked and underbanked prospects, you can use alternative credit to get a more accurate picture of those people and do business with the ones that meet your risk threshold.
Better Customer Identification and Fraud Protection
In addition to a reliable alternative credit score, a PRBC alternative credit report provides helpful information for confirming someone’s identity and protecting your business from fraud. That makes PRBC helpful to everyone from lenders to landlords.
Meet Regulatory Requirements
U.S. authorities are paying close attention to how lenders and other businesses accept people based on their credit. They're catching onto the fact that a low traditional credit score doesn't necessarily indicate that a person isn't capable of handling a loan.
The Equal Credit Opportunity Act (ECOA) ensures organizations are conducting fair, thorough appraisals of people's financial conduct. The ECOA states that creditors must - at an applicant request - consider credit information that isn't reported through a credit bureau. While the law requires businesses to accept alternative credit reports, you can get out ahead by proactively using them in your loan consideration.