While many consumers have specific questions about how the credit system works, how credit scores are derived and how the credit reporting system operates, most people today generally understand that their debt (such as car and mortgage loans, credit cards, student loans, etc.) repayment history is reported. Additionally, most of us are aware of the three national credit reporting agencies (Equifax, Experian and TransUnion) that house our credit information, and that lenders will request our credit reports and credit scores from one of these credit reporting agencies when we apply for credit.
What is less commonly known by consumers is that there are other credit reporting agencies that capture non-traditional credit information on consumers that lenders will sometimes access to help them in their credit review processes. What does non-traditional mean? This is industry jargon for credit information that is typically not captured and stored by one of the big three national credit reporting agencies.
Some examples of non-traditional credit include information on:
- How you manage your checking account. For example, do you have a history of bounced checks? How long has your checking account been established?
- Have you used payday lending services? Did you pay those loans back, and on time?
- Your payment history with rent-to-own furniture stores and subscriptions (magazines, CDs, etc).
- Payment of cable, utilities and even rent is sometimes collected and made available to lenders to use.
[Featured Product: Need credit monitoring options?]
While these types of data are not as widely and systematically used as the “traditional” credit data sourced at the three national credit reporting agencies, lenders may access this alternative credit information on applicants who do not have a credit report at the national credit reporting agencies or have what is called a “thin file”—meaning they have a very limited credit history. It is estimated there are approximately 30-50 million consumers who meet this definition. Lenders may incorporate this alternative information into the review of the credit application when the applicant has a robust traditional credit report, but is right on the edge of the credit score cutoff they employ with the credit score sourced from the regular credit reporting agency. Some lenders also leverage this alternative data in their fraud detection strategies and practices.
Most lenders will conduct a lot of analysis to first understand and quantify the incremental benefit (predictive power) this alternative data provides when trying to determine the future risk of their credit applicants—and will only access and use this data when they find it adds value.
If they leverage the alternative data to make a credit decision and it influenced any decline decision, then they must make you aware of this in the adverse action letter they provide and include the name of the alternative data provider to you, so you can request a free copy of that credit report and verify that the information collected on you is accurate.
Image: meddygarnet, via Flickr.com