All About Alternative Credit

What is Alternative Credit?

Any payment account that is not found in a traditional credit bureau report is considered “non-traditional” or “alternative” credit. We use the word Alternative. Typically, property managers and landlords, utility companies, cell phone providers, insurance companies and many other service providers, as well as many small finance companies, do not report their customer’s account information and payment history to the national credit bureaus; nor are they obligated to do so. Reporting credit and payment information is a totally voluntary option. However, just because it is not reported does not mean it is not valuable or useful.

Federal Law recognizes the importance of alternative credit information. Everyone is entitled under the Equal Credit Opportunity Act (ECOA) to present any alternative credit accounts for which they are responsible to anyone who requires a credit check when their creditworthiness is being assessed. Consumers can and should use this law to their advantage.

There are very few guidelines surrounding the use of alternative credit accounts related to consumer lending. For the purpose of federally backed mortgage loans, the Federal Housing Administration (FHA), Fannie Mae (FNMA), and Freddie Mac (FNMC) enacted policies for the verification and use of alternative credit, and established a tier system for the various types of alternative credit accounts based on their significance as credit references. Ranked in order of significance, account types are categorized into four separate tiers, with Tier I credit accounts weighted more heavily than Tier II, which are in turn weighted more heavily than Tier III, etc. These guidelines form the basis for the AMP Credit Rating model, and the eCredable verification policies.

The list below outlines the Four Tiers of accounts that comprise the AMP Credit Rating and the types of accounts that make up each tier.

Tier I credit includes payments for:

  • Housing - Rental
  • Housing - Mortgage
  • Housing - Rent to own

Tier II credit includes payments for:

  • Electric Utility
  • Gas Utility
  • Water Utility
  • Phone – Mobile or Land
  • Cable/Internet/Television service
  • Revolving accounts/Credit cards
  • Automobile/vehicle loan
  • Secured loan
  • Unsecured or Payday loan

Tier III credit includes payments for:

  • All insurance types with payments made at least quarterly (excluding payroll deductions)

Tier IV credit includes payments for:

  • Leases for furniture, appliances or durable goods
  • Layaway payments made monthly
  • Condominium/Homeowner association dues
  • Timeshare maintenance
  • Gym and physical therapy payment plans
  • Childcare and day care with regularly scheduled payments
  • Parking with regularly scheduled payments
  • Self-storage
  • Subscriptions and memberships with regularly scheduled payments

Why is alternative credit important?

Given today’s economic climate, there is increasing support for the use of "alternative" credit.  There are 45 million Americans who don’t have enough “traditional” credit history with the three major credit bureaus to get a credit score.  This group includes young adults with little or no access to traditional credit, recently divorced or widowed individuals with little or no credit in their own names, newly arrived immigrants, individuals with previous bankruptcies, and individuals who consciously shun the traditional banking system.

The financial history of regular bill payments such as rent, utilities, insurance and any other recurring payment obligations (i.e. payments for obligations other than “debt”) is generally referred to as “alternative”, “non-traditional” or “secondary” credit.  In reality, these bill payment obligations are primary for most households.  They are classified as alternative because the payment history information is not reported to the major credit bureaus.

Regardless of whether you have no credit file, a thin credit file, or a credit file with negative credit information, your alternative credit information can help you in any of these situations. If you have no credit file, or a thin credit file with no score, and you make on-time monthly payments, your alternative credit file may help you establish a payment history with any potential creditor.  If you your credit file contains negative payment information, your alternative credit file may help to offset those negative marks by showing the creditor a more complete picture of your credit history.  Even if you have good credit, but only one or two accounts, your alternative credit file may further boost your overall credit profile by demonstrating across many more credit accounts how conscientious you are about making timely payments.

What does the LAW say about alternative credit information?

Section 202.6(b)(6) of the Equal Credit Opportunity Act (ECOA) is a Federal law, enforced by the Federal Trade Commission (FTC) that states:

To the extent that a creditor considers credit history in evaluating the creditworthiness of similarly qualified applicants for a similar type and amount of credit, in evaluating an applicant's creditworthiness a creditor shall consider: (i)  The credit history, when available, of accounts designated as accounts that the applicant and the applicant's spouse are permitted to use or for which both are contractually liable; (ii)  On the applicant's request, any information the applicant may present that tends to indicate that the credit history being considered by the creditor does not accurately reflect the applicant's creditworthiness; and (iii)  On the applicant's request, the credit history, when available, of any account reported in the name of the applicant's spouse or former spouse that the applicant can demonstrate accurately reflects the applicant's creditworthiness.

The law is pretty clear that you have the right to present any information that demonstrates your creditworthiness, but the law is not clear about exactly how the creditor is required to “consider” the information.

How can the eCredable AMP Credit Report help me?

If you have little or no traditional credit and no credit score, an AMP Credit Report and AMP Credit Rating may help you show any potential creditor that you have a verified history of on time payments of your monthly financial obligations, from sources that are considered mainstream throughout the financial industry. 

If your credit file could use a little help, your AMP Credit Report may help to offset negative history, showing the creditor a more complete picture of your credit history by highlighting your verified history of on-time payments, especially if your monthly financial obligations are from sources that are considered mainstream throughout the financial industry.  Especially in today’s economic climate, bad things happen to good people.  By using your alternative credit file to show a more complete credit profile, your creditor may better understand the circumstances which created that bad mark against your traditional credit file.

Your AMP Credit Report is laid out in an industry standard format that creditors are familiar with.  It can be used by the creditor in underwriting and accessed electronically for credit scoring or other purposes. You are entitled to use your AMP Credit Report as a stand alone report, or as a supplement to the bill payments contained in your Equifax, Experian, and TransUnion credit reports.

Do all creditors use alternative credit information?

Almost all creditors use Alternative Credit Information in one form or another. There is a variety of information collected by a variety of companies falling into the category of Alternative Credit Information, but it’s very difficult for the consumer to know what the lender is using behind the scenes. If the Alternative Credit Information is being used for making credit decisions, the information must conform to all the rules and regulations spelled out in the Fair and Accurate Credit Transactions Act. At eCredable, we believe in complete information transparency, which is why the AMP Credit Report allows both consumers and lenders to have total transparency over the information being used in the AMP Credit Rating.

How can I improve the chances that my alternative credit will be considered?

First, you must take care that you always make your bill payments on time.  It is important that you can show as much positive payment history as possible when building an alternative credit report. 

Second, present your alternative credit to potential creditors in a manner that that makes it easy for them to consider.  Building an alternative credit report in a format that the creditor can use, verified by a source that creditors know and trust, can help your creditor streamline their alternative credit verification process.  Your AMP Credit Report will provide a creditor with on-line access (with your permission)  to your alternative bill payment history, verified by a source that is well known and established in the credit reporting and verification industry, and presented in a format that the creditor is used to working with every day.  AMP Credit Report verifications are conducted by one of the premier credit reporting and verification companies in the country.  eCredable’s verification provider's staff is FCRA certified, and all investigations and verifications meet or exceed the guidelines of Fannie Mae, Freddie Mac, HUD and FHA.

Third, time your verification and AMP Credit Report order with your credit event.  Just like with traditional credit, creditors will usually want to see the most current picture of your credit possible.  You should place your verification order so that your AMP Credit Report is completed within as few days as possible of presenting it to your creditor.

What steps should I take in building alternative credit profile with eCredable?

The goal in building alternative credit is to develop a credit history that 1) does not require going into debt to build it, 2) shows that you pay your monthly and regular financial obligations on time, and 3) can be used under ECOA Section 202.6(b)(6).

1.     Establish a secure eCredable on-line “self-storage” account that you control.  You will be able to view and update your account at any time. 

2.     Add your bill payment accounts (not reported to Equifax, TransUnion or Experian) to your eCredable profile. The more bill payment accounts that you have and the longer you have paid them on time, the better your profile may look to a prospective creditor, and the higher your rating could be.

3.     It could be important that your account information is independently verified by a third-party that is trusted by creditors, such as a member of the National Consumer Reporting Association.

4.     Request a verification of the information in your file within the 30 days prior to using it, such as when applying for an apartment or mortgage, credit, utility, phone, or cable service, insurance, or employment.  Note: A creditor may view your AMP Credit Report as “current” for 30 days.  You should order your verifications and AMP Credit Report with this time frame in mind.

5.     You may then download and print your AMP Credit Report, or give ANYONE you choose secure electronic access to the report via a secure password free of charge.

6.    Update your file before presenting it to a new creditor or service provider if your verifications are older than 45 days.

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