What is alternative credit data?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Many assume you automatically receive a credit report when you turn 18, but this is far from the truth. The three major credit bureaus (Experian®, TransUnion® and Equifax®) don’t open a credit file on you until you apply for and start using credit. Some people may live several years into adulthood without ever getting to this point. There’s a financial term for people who have little or no credit—they’re known as credit invisibles. Luckily, alternative credit data is now an option to help those with thin credit files. 

In 2022, an Experian report estimated that 49 million Americans had thin or nonexistent credit. More specifically, the report found that 28 million adults are credit invisible and another 21 million are considered unscorable. Unfortunately, lacking a credit presence can have negative financial impacts, including denials on credit applications or approvals with incredibly high interest rates. In fact, low or nonexistent credit can stop you from getting credit cards or loans, being approved for a mortgage or even getting hired for a job.

In response to this gap that’s leaving millions of Americans in a tough predicament, alternative credit data is becoming more popular.

What is alternative credit data?

Alternative credit data is information that allows lenders to have more insight into a person with a limited credit profile. Traditional credit data looks at factors such as:

• Credit card history
• Loan and loan repayment history
• Mortgage history
• Credit inquiries
• Public records, such as bankruptcy files

In comparison, alternative credit data looks at:

• Rent payments
• Utility payments
• Cell phone payments
• Payments for cable television
• Payments for subscription services such as Netflix
• Money management markers (the amount of money in your savings, frequency of withdrawals and deposits and how long your accounts have been open)
• The value of owned assets, such as cars or property
• Payments on alternative lending methods such as payday loans, rent-to-own payments, installment loans, auto title loans and buy-here-pay-here auto loans
• Demand deposit account (DDA) information (recurring payment deposits and payments, average account balance, etc.)

This alternative credit data is valuable information that can provide more insight into a person’s finances. For example, if someone has never missed a payment or made a late payment on their rent, has a decent amount of savings in their account and has a steady paycheck, you know they’re responsible with their money. Alternatively, a person who frequently makes late rent and cell phone payments will likely behave the same with credit payments.

How can alternative credit data be helpful?

When someone is credit invisible, it means FICO doesn’t have enough information on them to determine a credit score.

After opening your first credit account, you’ll have to wait another 6 months before FICO issues a credit score on your profile. This is because the system needs at least 6 months’ worth of data to establish a pattern of behavior.

People can become credit invisible for various reasons. They could have spent years in a mostly cash job, such as serving or bartending, and never bothered to open credit. Or maybe they were scared of debt and avoided credit to prevent temptation.

Whatever the reason, credit invisible people can’t get very far without traditional credit data to back them up. Here are some of the downsides of having a thin or nonexistent credit report:

• Getting approved for credit products without credit information is challenging, so these people often struggle to improve their thin profiles, even when they want to.
• When you do get approved, it may be at an incredibly high interest rate.
• It can delay or stop big life goals from happening, such as getting a mortgage or auto loan.
• Some landlords will deny lease applications due to a lack of credit history.
• Some employers reject job applicants based on their credit.

Alternative credit data can now give you a score if you don’t have one or improve your current score. 

In recent years, alternative data has grown in popularity because lenders have started to see this market segment’s value. It was previously assumed those with thin credit were risky individuals. Now, it’s become increasingly apparent that many of these people are individuals who’d potentially be responsible with credit.

Does alternative credit data really work?

Yes, alternative credit data works and is used by major credit bureaus and lenders. Additionally, alternative credit data is recognized by the Equal Credit Opportunity Act (ECOA). The ECOA requires that all credit scores:

• Prove the scoring model can accurately predict risk
• Don’t discriminate against any protected class based on marital status, gender, race, religion, sexual orientation, etc.

Alternative credit data can help both consumers and businesses: consumers benefit because it gives more credit opportunities to the credit invisible with a track record of being financially responsible. And businesses benefit because it widens the pool of potential candidates for creditors, lenders and companies offering financial products. 

How do I add alternative credit data to my credit report?

There are a few options when it comes to alternative credit data.

UltraFICO

In 2018, FICO introduced its UltraFICO score to help those with a thin or nonexistent credit profile. Consumers just link their bank accounts with their FICO profile to add alternative data. If a consumer is financially responsible, they might see an increase in their FICO score. This is a free service and only requires a voluntary opt-in.

Experian Boost

In response to UltraFICO, Experian introduced its Experian Boost service. This free service allows consumers to link their bank accounts to their Experian profile to provide the credit bureau with more financial information. Experian says that, on average, consumers saw a 13-point increase in their credit score with Experian Boost.

Note that to benefit from this service, your lender will need to pull a FICO Score 8 or higher and use Experian as the credit bureau of choice.

ExtraCredit

ExtraCredit is a Credit.com product that promises to give you “unmatched credit coverage for one, low monthly fee.” Through ExtraCredit’s Build It feature, consumers can link their bank accounts and have their rent payments reported in their credit profile. ExtraCredit verifies the payments and reports them to the credit bureaus on your behalf.

It’s important to note that to benefit from alternative credit data, you’ll have to use a lender willing to use or already using this type of information when evaluating potential borrowers. While many lenders are slowly adopting these alternative scores, it’s not widespread across all credit lenders yet. Consider asking your lender up front if it uses alternative credit data before you apply.

Are there risks to adding alternative credit data to my credit report?

Alternative credit data has the power to improve your credit score if the data is favorable. But if you give access to alternative credit sources and the data is full of instances of delinquent payments, your credit score can decrease. 

Only agree to the use of alternative credit data reporting if you’ve been responsible with your financial obligations. 

How does your credit look?

Now that you know what alternative credit data is, it’s time to decide if you need it. First, know where your credit stands. Get a copy of your credit report and credit score. You may need alternative credit data if you have a thin profile or a low credit score. Remember that alternative credit data will only benefit you if you’ve been responsible with payments.

Even if you’re relying on alternative credit data right now, it’s never too early to start building up your traditional credit data. You can improve your credit by making payments on time, reducing your debt and keeping your credit utilization ratio low. Additionally, you can review your credit report to understand where there’s room for improvement.

Worried you won’t know how to interpret your credit report and understand what steps to take next? Lexington Law can help with a free credit assessment, which includes a credit repair recommendation. 

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.