Credit Cards

Can't Qualify For A Loan? Alternative Scoring Models Can Help

We explore how individuals who can’t qualify for FICO scores can make use of alternative scoring models. Dozens of companies exist that allow consumers to submit pieces of data ignored by all the traditional scores.

The most popular credit scoring models in-use today render millions lock millions of Americans from the ability to get a loan. According to the Consumer Financial Protection Bureau, that number could be as high 26 million.

New credit scoring models have begun to emerge in recent years to tackle this problem. Companies like eCredable and Happy Mango collect non-traditional data and generate their own credit reports for their customers. These reports can then be presented to lenders to prove credit worthiness. This is a massive opportunity for borrowers who can’t qualify for a FICO score. Without such companies, they may not have access to credit.

Many people today are aware of the typical factors affecting their credit scores – late payments, bankruptcies, outstanding debt, etc. However, these new models tap into databases with different information.

Utility Bills & Rent. Lenders and vendors want to see that you have the ability to pay your obligation. Not everyone has a credit card or mortgage to help then establish a history of payments. However, most people do pay gas, electric, water, or phone bills. Alternative credit score models can look at these to help make a case for your credit worthiness. You can establish your financial stability by demonstrating the ability to repay your bills on time.

The same is true of rent payments. It may be helpful to produce receipts of your rent or a letter from your landlord.

Medical Bills. Historically, FICO used outstanding medical debts as part of your score. Some new scoring models have proposed doing away with this data point. Medical billing is complicated, and in some cases may take a long time to resolve. For example, your health insurer may take a long time to actually approve a charge. The debt may show up as outstanding during that time if a medical provider chooses to report it to a credit bureau.

A new bipartisan bill has recently been introduced to Congress. It would prevent medical bills from impacting the credit rating of U.S. war veterans. While a small step forward, it may pave the way to completely do away with the practice of using medical bills in credit scoring.

Cash flow is perhaps one of the most important pieces of information not captured through standard credit scoring models. This should be especially interesting to people who make a decent living and keep their debt-to-income ratio low. The lender will be more confident in your ability to repay debt once they see you have a lot more money coming into your account than going out.

Mainstream Credit Models Are Changing Too

You won’t always have to seek out alternative credit score companies. Giants like FICO and VantageScore are aware of their shortcomings and work towards implementing improvements. FICO itself has gone through multiple revisions since it began over 25 years ago. It is currently on its 8th version. Last year they suggested experimenting with new data sources, including some we discussed above.

Additionally, legislators are making moves to help consumers be treated fairly. The Fair Credit Reporting act gives lawmakers the authority to impose certain standards, such as the one affecting veterans and medical payments.

Large banks and lenders, however, are likely to adapt slowly -- even if new models are introduced. For example, the mortgage industry prominently uses FICO Score 2, 4 and 5. This despite the fact that FICO Score 8 has been around for years.

Robert Harrow

Robert is a Product Manager at ValuePenguin, covering credit cards and credit card processing. He graduated from Hunter College with a B.A. in Physics and a minor in Mathematics.