Alternative Credit Histories

Banks and credit card companies historically have relied on FICO scores — developed by Fair Isaac & Co. — to determine a person’s credit. But some organizations and financial institutions are unseating these scores with alternative credit databases that embrace those who are unbanked, those without credit and those in traditional credit recovery.

These alternative databases rely on residential lease payment trends, utility bill remittances, prepaid card transactions at the point of sale (MasterCard, Visa and American Express branded cards available for reload), prepaid phone services spend, relationship longevity and more.

According to credit bureau Experian, almost 18 million Americans have files with too little data to yield scores, and another 17 million have no files at all. The initiation of alternative credit histories could not only benefit formerly disenfranchised consumers but also help create a new cottage industry.

Will Clients Come?

In the 1980s, FICO really took off. Its scoring helped credit card issuers target preapproved offers, and it later pulled mortgage lenders into growing their businesses, as bubble-like as it became.

“Their innovation was through scoring in that they could summarize consumers to a kind of structure,” said Ken Paterson, principal analyst at Mercator Advisory Group.

Whether new scoring organizations can succeed is sketchy, he added. “It may just be a lot of hype in the press,” he said, referring to the drop in confidence around the FICO scoring model. “The reality with most lenders is that FICO is strongly embedded in their processes,” and it…


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