Many people assume that you automatically receive a credit report when you’re born or turn 18, but this is far from the truth. The three major credit bureaus (Experian, TransUnion and Equifax) don’t open a credit file on you until you apply for and start using a form of credit. Some people may live several years into their adult lives without ever getting to this point. There is a financial term for people who have little or no credit—they’re known as credit invisibles.
As of 2019, there was an estimated 26 million adults in the United States with a thin or stale credit score. Unfortunately, these people can find themselves facing denials on credit applications or approvals with incredibly high interest rates. In fact, a low or nonexistent credit score can stop a person from getting credit cards or loans, being approved for a mortgage or even getting hired for a job.
In response to this gap that’s leaving millions of Americans in a tough predicament, alternative credit data is becoming more popular.
What is alternative credit data?
Alternative credit data is information that allows lenders to have more insight into a person with a limited credit profile. Traditional credit data looks at factors such as:
- Credit card history
- Loan and loan repayment history
- Mortgage history
- Credit inquiries
- Public records, such as bankruptcy files
In comparison, alternative credit data looks at:
- Rent payments
- Utility payments
- Cell phone payments
- Payments for cable television
- Payments for subscription services, such as Netflix
- Money management markers (the amount of money in your savings, frequency of withdrawals and deposits and how long your accounts have been open)
- The value of owned assets, such as cars or property
- Payments on alternative lending methods such as payday loans, rent-to-own payments, installment loans, auto title loans and buy-here-pay-here auto loans
- Demand deposit account (DDA) information (recurring payment deposits and payments, average account balance, etc.)
This alternative credit data is valuable information that can provide a clear picture of how risky a consumer is. For example, if a person has never missed a payment or made a late payment on their rent, has a decent amount of savings in their account and has steady recurring income, then you know they’re responsible with their money. Alternatively, a person who frequently makes late rent and cell phone payments will likely behave the same with credit payments.
How can alternative credit data be helpful?
Alternative credit data can give you a score if you don’t have one or boost your current score. Many people have ended up—either intentionally or unintentionally—as credit invisible. This means FICO doesn’t have enough information on them to determine a credit score.
After opening your first credit account, you’ll have to wait another six months before FICO issues a credit score on your profile. This is because the system needs at least six months’ worth of data to establish a pattern of behavior.
People can become credit invisible for various reasons. They could have spent years in a mostly cash job, such as serving or bartending, and never bothered to open credit. Or maybe they were scared of debt and avoided credit to avoid temptation.
Whatever the reason, credit invisible people can’t get very far without traditional credit data to back them up. Having no credit data is like a vicious cycle—it’s challenging to get approved for credit products without having credit information. So these people struggle to improve their thin profiles even when they want to.
However, in recent years, alternative data has grown in popularity because lenders have started to see this market segment’s value. It was previously assumed that those with thin credit were risky individuals. Now, it’s become more and more apparent that many of these people are potentially safe individuals who would be responsible with credit.
Does alternative credit data really work?
Yes, alternative credit data really works and is used by major credit bureaus and lenders. Additionally, alternative credit data is recognized by the Equal Credit Opportunity Act (ECOA). The ECOA requires that all credit scores:
- Prove the scoring model can accurately predict risk
- Don’t discriminate against any protected class based on marital status, gender, race, religion, sexual orientation, etc.
Alternative credit data can help both consumers and businesses. It gives more credit opportunities to the credit invisible who have a track record of being financially responsible. Of course, some people with thin credit profiles are high risk. But a report titled “Research Consensus Confirms Benefits of Alternative Data” found that a significant portion of credit invisible people are low to moderate risk.
Options for alternative credit data
There are a few options when it comes to alternative credit data.
In 2018, FICO introduced its UltraFICO score to help those with a thin or nonexistent credit profile. Consumers simply need to link their bank accounts with their FICO score to provide additional indicators of sound financial behavior. If a consumer is financially responsible, they might see an increase in their FICO score. This is a free service and only requires a voluntary opt-in.
In response to UltraFICO, Experian quickly followed and introduced its Experian Boost service. This free service allows consumers to link their bank accounts to their Experian profile to provide the credit bureau with more financial information. Experian says that, on average, consumers saw a 13-point increase in their credit score with Experian Boost.
Note that to benefit from this service, the lender you’re using will need to pull FICO Score 8 or higher and use Experian as the credit bureau of choice.
Level Credit is a company that promises to help “consumers build the credit they deserve.” Through Level Credit, consumers can link their bank accounts and have their rent payments reported in their credit profile. Level Credit verifies the payments and reports it to the credit bureaus on your behalf.
It’s important to note that to benefit from alternative credit data, you’ll have to use a lender that is willing to or already does use this type of information when evaluating potential borrowers. While many lenders are slowly starting to adopt these alternative scores, it’s not completely widespread across all credit lenders yet. Consider asking your lender up front if they consider alternative credit data before you apply with them.
How does your credit look?
Now that you know what alternative credit data is, it’s time to decide if you need it. First, know where your credit stands. Get a copy of your credit report and credit score. If you have a thin profile or a low credit score, you may need alternative credit data. Remember that alternative credit data will only benefit you if you’ve been responsible with payments.
Even if you’re relying on alternative credit data right now, it’s never too early to start building up your traditional credit data. You can improve your credit score by making payments on time, reducing your debt and keeping your credit utilization ratio low. Starting these behaviors early will also set you up for success so you’re always making financially sound decisions.
Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.
Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
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