Consumers with a solid credit history may not give it a second thought when they apply for a cellphone, an apartment or a new insurance policy. But for the estimated 53 million Americans without a FICO score — often recent graduates, immigrants or those who prefer not to use credit — these seemingly simple tasks can be much more complicated.
Aneesh Varma, 31, knows this frustration firsthand, having moved from New York to the U.K. eight years ago when he worked in finance. “I had a decent job and a decent salary, but I didn’t realize your credit history doesn’t move over with you,” Varma says. “I was starting from scratch.” Varma couldn’t get a cellphone contract when he arrived and says he still couldn’t “confidently apply for products” even three or four years after the move. He wrote to members of Parliament and U.S. senators to alert them of the challenges faced by immigrants without credit in their adopted country. Eventually he decided to create his own solution, a startup company called Aire that bills itself as “credit scores for humanity.”
Thanks to a growing awareness about the challenges of people with thin credit files, FICO is running a pilot program this year with a small number of lenders. A handful of companies in the U.S. and abroad have also developed alternative credit scoring models. Here’s a look at several of these ventures.
Aire
Launched in January 2014, Aire uses data provided by users to develop an alternative credit score for those who don’t have a traditional credit score. If Aire can’t validate the data, then it won’t generate a score. Varma compares it to the thought process two people might have if they met for the first time, and one person asked to borrow money. “Do you have a source of income?” he asks. “What do you spend on? How do you manage money? How do you look at allocating risk and reward? That sequence of things that you would want to know about in a human interview process is what we have replicated in our app. We paint a picture of who you are and whether or not you’re a persona who should handle credit.” Aire is free to consumers and currently only serves the U.K. market, but Varma sees a global need for it and hopes to expand to other markets in the future. His startup is currently conducting pilots with lenders in several categories such as credit cards and loans so that users can qualify for those financial products.
eCredable
With eCredable, which was started in 2009, consumers pay a one-time fee of $20 per bill account. The company manually contacts the landlord, utility provider, insurance company or other vendor to verify timely payments and gives consumers a letter grade (A through F) based on their payment information. The report is called an AMP credit rating (where AMP stands for “all my payments”), and eCredable will share it with a potential landlord or lender with the consumer’s permission. “The challenge for so many consumers is credit is a catch-22,” says eCredable CEO Steve Ely. “Nobody wants to give you credit unless you already have credit.”
Under the Equal Credit Opportunity Act, which protects against credit discrimination, Ely says lenders are required to consider information provided by borrowers. However, many lenders find it cumbersome to underwrite loan applicants who don’t have traditional credit scores, so eCredable helps by verifying an applicant’s payment information for them. “We’re a bridge to credit, but we’re not the kind of credit bureau that people will stay with for life,” Ely says. “Once they start building their traditional credit file, they’ll focus on that credit file.”
FactorTrust
FactorTrust was founded in late 2005, because as CEO Greg Rable puts it, “underbanked nonprime consumers weren’t getting their data tracked and weren’t getting credit for good performance and paying on time.” Lenders that serve nonprime consumers don’t always report to the three major credit bureaus, so FactorTrust collects payment data on installment and revolving loans and compiles the data into its own credit report, which lenders can use to assess risk and extend credit to borrowers who might not qualify using a FICO score. As with the aforementioned credit reports, consumers can request a copy of their report from FactorTrust and dispute any inaccuracies, but unlike the other companies, it’s not a service that consumers sign up for. Instead, it’s the lenders who opt in, so there’s no cost to the consumer. FactorTrust, based in Atlanta, works with lenders in the U.S., Canada and the U.K.
Happy Mango
U.S.-based Happy Mango incorporated at the end of 2013 with a mission to “humanize credit.” Kate Hao, former treasurer of Morgan Stanley, founded the startup after noticing gaps in the consumer credit market. “Every month I can get a report on how many [borrowers] have defaulted, but it doesn’t tell me anything about whether the borrowers do have cash flow, whether they have a job, what industries they work in,” she says. “That level of information did not exist.” Other personal finance tools aggregate banking and credit card information to help consumers understand where their money goes. Happy Mango applies that aggregation technology to pull in financial information with the user’s consent and help lenders make credit assessments based on information not found in a credit report. Other platforms tend to focus on day-to-day transactions, while Hao says Happy Mango, which is a free service, focuses on the bigger financial picture. Consumers who carefully manage their cash flow but don’t have an established credit history are most likely to benefit from Happy Mango, Hao adds. “If you’re really not good at managing your finances, our assessment is going to show that,” she says.
Before Signing Up
Before enrolling with any alternative credit scoring company, Beverly Harzog, credit expert and author of “The Debt Escape Plan,” recommends checking the company’s reputation with the Better Business Bureau. You should also monitor your report with the major credit bureaus — Experian, TransUnion and Equifax — and dispute any incorrect information that may prevent you from qualifying for traditional credit. “I see [alternative credit scoring models] succeeding because there is such a need,” Harzog says. “I don’t think it’s going to change overnight, but we are trending towards that.”
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Can Alternative Credit Scoring Models Help Millions of Consumers? originally appeared on usnews.com
Clarification 06/23/15: An earlier version of this story misstated FactorTrust’s role in helping consumers access financial products.
Correction 06/24/15: An earlier version of this story misattributed a quote to Greg Rable.
