Oct 27, 2021 MicroBilt News
22% of Americans don't have a credit score.
That's nearly one-fourth of Americans with no ability to get a credit card, loan, or other lines of credit. This leaves them in a bind of needing good credit to get credit but not having a credit history.
If consumers are looking to purchase a house or even rent a home, having a low or no credit score can lead to serious issues and hinder them in taking life's next steps. It can also halt your ability to give them loans they may qualify for if you use alternative methods.
For those who have no or bad credit, alternative credit reporting may be the answer for you.
This blog post will go over how credit is determined and how you can lend to individuals without a credit history.
Read on for more information.
What Determines Your Credit Score?
A recent survey shows that 4 in 10 Americans, nearly 40% of Americans overall, don't know how their credit score is determined. If you're looking for alternate credit reporting, clients need to know how credit is reported.
Let's go over how a client's credit score is traditionally determined.
Credit Cards or Other Loans
Having a credit card with a line of credit that a client pays every month on time is one of the ways to build credit. Of course, you need credit to qualify for a credit card, which fuels the dilemma here.
If clients don't pay their credit card on time, if they max out their credit card, or they have a court order to pay their card, or their debt was sold to a collection agency, all of this will negatively impact their score.
Opening Several Lines of Credit at Once
If an individual opens several lines of credit in a short period of time, it can look suspicious to credit reporters and make it harder to give out a loan. It means they're in a tight spot financially and not making responsible decisions with their money.
Using Payday or Quick Cash Lenders
If clients get a short-term high-interest loan, like a payday loan, this can negatively affect their credit score. The same goes for obtaining quick cash loans.
Moving around a lot can also negatively impact an individual's credit score. While technically, it doesn't feel fair, especially if they move a lot for your work. But if they don't have a fixed address, it can indicate instability.
Lending to Those Who Don't Fit Traditional Categories
If an individual has poor credit or bad credit history, it can make it difficult for you to lend to them. Luckily, there is alternative credit reporting to save the day.
Alternative Credit Reporting: What Is It?
The things we mentioned above are those that are reported automatically to determine one's credit score. If an individual wants to build credit or raise their score, they can do a few alternate credit reports.
They'll typically need to report these themselves, or they'll need to tell the agency you pay these items to that you want this data included in your credit report.
What Can Be Included in Alternative Credit Reporting?
In this section, we'll have a look at what you can include for alternative credit. These alternative solutions can be built upon while one is in college and help them have a credit score when they graduate.
Rent and Utility Payments
With the client's permission, they can have your utility company and/or rent payments count toward your credit. This won't happen automatically, but it is a great way to start building a credit history. They can even begin as soon as you move out for the first time.
Bank Account's History
One can discuss with their bank reporting alternative credit history regarding their bank account. This means one can consider how long the bank has been open, how much money they have in savings and how much money goes in and out.
This is another great way to build credit from the beginning of their adult life.
Payday Loans, Auto Title Loans, Rent-to-Own Schemes
We previously discussed that payday loans could be detrimental to one's credit score. That's true, but if they pay them back on time and in full and report them to the correct agency, these can actually count in their favor. With this avenue, they can turn to be in a pinch to a credit building opportunity, making the best of a bad situation.
Does the individual own a home or a car? If so, the value of your assets can help determine their credit score. This method won't work for those just beginning to build their credit but works well for those who have fallen on hard times and need to rebuild their score.
Alternate Credit Reporting Means More Lending Opportunities
With alternate credit reporting methods, you can have more opportunities to lend to people who wouldn't otherwise be eligible. Doing this broadens your horizons and allows you much more flexibility in lending and choosing whom to lend to.
Additionally, these methods can enhance the lives of those you're lending to. While your primary concern is likely how your business is faring, you'll be able to impact the lives of those who may feel trapped by their traditional credit report and its limitations. You may open up a whole new opportunity for someone.
Click here to see how Microbilt can help you with your company's lending decisions.