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Lenders have always used credit scores as basis to determine the creditworthiness of a person. For years, this has lead various financial institutions to do well with their business. In fact, for years this has been the dominant requirement for loan application. Lenders would always require credit reports from Credit Reporting Agencies, before a person could push through with the rest of the application.
In the early part of January, time.com had an article stating that lenders are doubting the reliability of credit scores since FICO cannot shield them from having bad borrowers. This article, Mike Mondelli, the president of L2C mentioned that Credit scores are very good with separating the good from the bad but this cannot determine the ability of the average person to repay the loan and even determine who among them would struggle.
This does not mean the FICO scoring would be useless and it deserves to be totally eliminated from the system. This method has indeed helped many lending businesses become profitable in the past. However, situations have changed and in some situations the FICO scoring is not just effective. As a result, more and more lenders are now looking beyond credit scores. Some businesses or financial institutions are becoming profitable by using alternative credit information in evaluation loan applicants.
Alternative credit information refers to the non-financial information that is not usually reported in Credit Bureaus. This has been an effective tool in determining the credit risks involved. They are highly used to evaluate people who are considered unscorable (unscorable or unbankable means people who have thin file records). Low-income nations also use this, especially when there is a high rate of unemployment or a large percentage of the population has little credit history.
So how is alternative credit information used? This information will be then used to calculate the credit scores. The items needed are different from the factors used in FICO scoring. What is needed in here are information or payment history made for your utilities like gas, electricity, cable and other stuff. Even your telecommunication bills will also be tapped into. Other information needed will also include your rental payments (if you are renting your current homes) and electronic payments made like remittances and withdrawals.
There are also credit reporting agencies that can determine your credit worthiness using this data. Among them are: Pay Rent, Build Credit, TransUnion, First American Credco and LexisNexis. They have their own scoring method that is different with the First Isaac Corporation scoring.
There has been a growing use of alternative credit information in making financial decision. In fact, many banks have been using this data as part of the underwriting process.
Therefore, the next time you apply for loans, do not just focus in making on time payments only with your major debts and credits. Do also pay attention to your monthly bills and other payment transactions. The latter are no longer disregarded in making financial decision. It is a big time factor to determine your credit capacity.
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