Like so many elements of the post-recession financial system, credit scoring is past due for an overhaul. Think of it this way: As we approach the 2012 Summer Olympics, America’s best athletes are exactly the sort of people who could eat a lot of fast food and not get fat. But their coaches aren’t exactly encouraging them to wolf down the extra-bacon double cheeseburgers. Rationally, we should encourage people toward good behavior, rather than just reward them for getting away with bad behavior.
Yet, our standard credit scoring system doesn’t account for most good financial behaviors. Instead, we only measure how good you are at climbing out of the hole once you’re already in it. We rate how good you are at being in debt, but outside of credit cards and loans, you get no points for actually paying your bills on time. Financially, Americans are out of shape. As we train ourselves back to competition weight, we need to measure our healthy behaviors as well as our unhealthy behaviors. This is why the future will see a greater emphasis on “alternative” credit scores from agencies such as PRBC.
To understand the need for alternative credit, you have to know a little about how traditional credit works. Almost everyone has seen at least one advertisement exhorting people to check or improve their credit scores. But most people know very little about what actually goes into these three-digit numbers (ranging from 300 to 850) which supposedly judge your fitness to receive a loan, buy a home, buy a car, etc. The “traditional” credit score is based on information measured by the “big 3” credit bureaus: Equifax, TransUnion, and Experian. A traditional score is based on the consumer’s performance with regard to their credit cards, mortgages, and other “mainstream” debt.
This creates a “catch 22” in credit: traditional scores only measure people who have already been in debt. If you’ve never taken a loan, mortgage, or credit card, it’s difficult to get one. At least, not without paying an exorbitant interest rate. And this problem isn’t a rarity. More than 70 million Americans are “underbanked” (lacking sufficient history to be measured by traditional credit scores), and they cover all demographics and income levels. That’s a quarter of the population (and over a trillions dollars in spending power) underserved by traditional credit!
The philosophy of the traditional credit score comes from a soon-to-be bygone age, in which debt was simply a way of life. People lived on credit with the assumption that there would always be more money and better paying jobs available in the future. A life of debt didn’t seem that risky. Post-recession America carries a different philosophy: Don’t Buy Stuff You Can’t Afford.
We are told: “Pay your bills on time. Don’t go into debt.”
Ironically, institutions that offer credit and loans will look negatively on this “responsible” American. Though the responsible spender pays his or her bills (utility bills, rent, phone, cable, insurance, etc.) on time, none of these payments are measured in a traditional credit score. The current system only scores payments on debt. And this is the exact debt we are supposed to be avoiding in the first place. Such a responsible spender may have no measurable credit history, and will look like a big question-mark to lenders.
Problem is, almost everyone needs credit at some point. It’s nice to think we can save up the money beforehand for every purchase. But if your car suddenly needs a new transmission and you can’t afford it, it’s tough to save up the money when you can no longer drive to work. Or if you’d like to raise your new family in a house instead of an apartment, it may not be practical to simply save your money and buy a house when the kids are in their 30s. Some purchases can’t wait. Without enough debt history for a strong traditional credit score, where do you turn?
"This is where a PRBC (Payment Reporting Builds Credit) credit score comes in. An alternative credit score measures bill payments, rather than debt payments. Thus, an alternative credit score is relevant to almost everyone. With such broad application, it’s really not so “alternative” after all, is it?" commented MicroBilt's SVP, Sean Albert. "Not every fiscally responsible person goes into debt often. But every responsible person pays their bills. Alternative credit scores let creditors know whether or not a person has generally paid all their obligations on time. If they have always paid faithfully, it seems logical that they would pay their future loans on time as well".
PRBC’s goal is to fulfill this alternative credit purpose in a unique way. Previously, credit bureaus specializing in alternative credit have charged a subscription or fee. PRBC does not charge consumers for the privilege of having their payments verified. Consumers need only register a membership at the PRBC website.
The transition to a new credit regime may seem like an uphill battle. Financial institutions have relied on the traditional credit scoring system since the ‘80s, and one could assume they’re reluctant to try something new. Luckily, the law has already started to address this through the Equal Credit Opportunity Act (ECOA). Under the ECOA, if you have alternative credit data available, and ask a potential creditor to look at it, the creditor is legally obligated to consider it when making a decision on you.
The fiscal and legal climate seems right for alternative credit scores to join traditional credit scores in the financial mainstream. And it’s long overdue for both creditors and consumers to take notice. It’s time to get in competition shape, and fast-food credit just isn’t enough anymore.
MicroBilt is the leader in serving small businesses with data and tools that they need to manage business risk and make informed lending and hiring decisions. MicroBilt offers the small business owner simple, cost-effective solutions for fraud prevention, consumer financing, debt collection, and background screening. With its PRBC® Consumer Report, MicroBilt is the leading provider of alternative credit data to businesses that want to offer credit and other financial services to the over 100 million underserved consumers in the United States. For more information, visit www.MicroBilt.com