Information on Alternative Credit

People who do not have a traditional credit score -- there are 50 million of them, according to the Fair Isaac Corporation -- sometimes wonder how to get a loan if obtaining one requires a credit history. As long as you pay bills each month you can probably acquire the standard lines of credit, such as a mortgage and credit card, but it may prove a little tougher than normal.

What is Alternative Credit?

An alternative credit score is a risk model that factors in payment data not normally used by the major credit bureaus. This can include any type of creditable account, such as utilities and rent. Unlike with normal credit accounts and loan, the creditors of nontraditional payments usually do not report payment data to the bureaus, so the consumer must pay a third party to verify payment data and make the reports viewable to future lenders.

Benefits

Some people prefer to use cash only or loans so sparingly that the credit bureaus cannot give them a reliable score. If those without a credit history want a loan, they are usually out of luck when going by the standard credit rating model. By using alternative means to prove creditworthiness, banks can open up the credit market to a large, potentially lucrative sector of the market, such as minorities, young adults and women, according to USA Today.

Drawback

Lenders do not have to accept an alternative credit score and many take the wait and see approach until the credit industry has a firmer grasp on the legitimacy of alternative scores. Fannie Mae and Freddie Mac -- two the of largest mortgage providers in the U.S. -- do not accept these scores as of 2009. The use of alternative scores is gaining steam, and most of the larger credit bureaus and credit scoring companies, such as the Fair Isaac Corporation, have algorithms for alternative scores.

Tip

You can prove your own creditworthiness without a formal scoring system by presenting evidence that you pay bills voluntarily. Before credit scores took off in the 1970s and 1980s, lenders often used informal judgments on credit decisions. The Federal Housing Administration, for example, will consider canceled checks for services and written statements from creditors detailing your account history.