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Alternative credit may soon get the recognition it deserves

Oct 17, 2014 Philip Burgess

Alternative credit may soon get the recognition it deserves

Before the Great Recession, speaking about alternative credit may well have resulted in some blank stares and confused looks. This is because last decade, many people didn't know that they could tap into different sources of finance when they needed money. As we all know now, however, these lines of credit became crucial to a number of individuals during the financial tumult that capped off the 2000s.

In 2008, during the height of the recession, many people couldn't access traditional bank loans when they wanted to make large purchases like homes or cars, or even contend with simple rising costs and unexpected expensive events. As such, a large population turned to financiers like short term lenders and other sources that offered alternative solutions.

However, now that the economy is in a better place and is rapidly becoming even healthier, a lot of these people still have poor credit scores because of fiscal decision they had to make during the downturn. When consumers had trouble keeping up with food costs, gas prices, utilities bills and other expenses, something had to give, adversely affecting a huge swath of the population. As such, these individuals may still have a hard time accessing traditional credit lines.

Alternative credit scoring is a rising trend throughout the financial industry, representing something that might help consumers who continue to struggle, particularly when unexpected bills crop up. These types of credit scores provide a more complete financial portfolio and can even take into account when various bills are paid on time - traditional rankings currently only count late payments against consumers.

Increasingly, lenders of all kinds are taking these scores into consideration as a way to open up their target audience and bring in more revenue. The usefulness of alternative consumer credit scores may soon be recognized by national leaders.

Fannie Mae, Freddie Mac asked to take a look at new scores

As The Washington Post pointed out, more traditional consumer credit rankings, like FICO models, are decades old and are outdated at this point, but they're still being used by major mortgage lenders Fannie Mae and Freddie Mac. That being said, interest groups have lobbied against this, saying older strategies are taking their tolls on minorities who want to make large purchases and actually discouraging people from buying their first homes.

"They pay their bills for rent, utilities and cellphones, but none of these are reported to the national credit bureaus," the newspaper noted.

Various organizations are publicly requesting that Fannie Mae and Freddy Mac evolve their standards of checking an applicant's creditworthiness. As the source reported, a number of financial groups and civil rights associations are starting to ask the two corporations to adopt various scoring models. Not only are there alternative rankings available that may prove that consumers would be able to pay back large loans, but the Post said that Freddie Mac and Fannie Mae haven't even taken into account the latest types of scores created by FICO developer Fair Isaac.

According to the news provider, Andrew Wilson, a representative from Fannie Mae, said that the corporation believes it employs a useful way of measuring creditworthiness. That being said, Wilson also noted that the organization is considering other types of scores, including the latest iteration of FICO.

Change supported by the government
The Los Angeles Times reported that U.S. Rep. Maxine Waters proposed an amendment to the Fair Credit Reporting Act. Should this pass, most negative information would be deleted from credit histories within four years of the incidents, and bankruptcies would be on a person's credit report for seven years, instead of 10.

Waters' moves bring to light the fact that the current standard of scoring consumer credit is flawed. The news source pointed out that, at this point, many national credit bureaus are starting to embrace using additional alternative credit data, along with their own traditional information, to compile a complete fiscal portfolio. That being said, changes need to be made across the board.

New credit scoring models are likely going to be helpful for individual lenders. Those who may not qualify for a loan with their FICO scores might actually be very creditworthy - it's just up to companies to dig a little deeper. Upon doing so, they may be able to open up their doors to equally worthy applicants and increase revenue.