Many millennials still remember the effects of the 2008 financial crisis.
And many Americans may hesitate using credit cards and other types of debt as ways to build credit when they’re trying to navigate the financial challenges of today.
Indeed, according to an analysis of recent Federal Reserve data by The New York Times, the percentage of Americans under 35 who hold credit card debt has fallen to its lowest level since 1989.
But that doesn’t mean building credit isn’t important. In today’s world, if you want to buy a home, a car, or even a new smartphone plan, your credit history matters.
If you want to create a strong financial reputation but don’t have the traditional credit to make it happen, one of your options is to focus on alternative credit reporting.
With the help of alternative reporting, it’s possible to build credit, even if you haven’t borrowed much.
Living debt-free could lead to a thin credit history
When it comes to traditional ways to build credit, the focus is on lending. After all, the point of your credit history is to track how you handle, well, credit.
Essentially, it’s all about the loans you’ve had and the way you’ve paid them back. If you want to live debt-free for the most part, however, that often means you have what is known as a “thin file.”
When looking at the alternatives, it may not matter to you that you have a thin credit file. You might be willing to pay a little extra on insurance premiums and other items if it means living debt-free.
Things change, though, if you decide you want to make a major purchase that requires a large amount of capital you don’t have. When you want to buy a home or a car with a loan, that thin file suddenly becomes problematic.
You might not even qualify for a loan because lenders are jittery about providing you with the cash when they have no evidence that you can handle loan repayment.
Traditional vs. alternative credit reporting
In the past, Steve Ely the CEO of eCredable and a former credit industry executive talked with me about alternative credit reporting and how it can help you thicken that credit file a bit.
Ely says that alternative credit reporting is a way for you to get your first traditional loan using information about the way you pay your non-credit bills.
Basically, rather than just focusing on the way you repay your debts, alternative credit reporting works by taking into account your payment habits related to non-credit accounts. These can include your gym membership, rent payments, and utility bills.
If you make your payments on time and in full, your alternative credit rating might allow you to apply for credit cards, personal loans, auto loans, and even home loans.
Focus on trade lines
Ely also points out that the focus on alternative credit reporting is on trade lines. These are regular account payments you make that might not necessarily be traditional loans.
For instance, you know you will need to pay your cell phone bill each month, and that gym membership comes due regularly. Making these regular payments show how you manage your money.
It also shows you don’t have to take out a loan to prove that you can make on time payments and handle your bills.
When using alternative means to build credit, you are responsible for submitting your trade lines to the alternative reporting agency. You choose the bills you pay, and the agency contacts the company to verify your payment activity.
However, Ely says that some of the bills are weighted differently. For example, he says, paying a large bill like your rent has a bigger impact than whether or not you make your mobile phone payment on time.
Many alternative credit reporting agencies use this information to create a grade for you. It might be based on a numerical scale, or a letter scale (with A representing the best grade).
Once you have a grade, it’s possible to apply for loans through companies that partner with the alternative reporting agency.
Prepare to pay
When you use alternative means to build credit, you need to be prepared to pay.
Alternative credit reporting agencies do a lot of administrative work to track down your payment history. Ultimately, that means you need to pay them to go through the process of compiling a report.
Some alternative credit reporting companies require you to pay each time you have a report compiled. Others may allow you to link eligible accounts and automatically update them for an annual fee.
It’s also important to be aware that you might not get your best interest rates when applying for loans through companies that partner with alternative credit reporting agencies. That’s because you still present a risk since you don’t have experience with traditional credit.
Ely acknowledges that rates offered by such partners might be higher than average for someone with good traditional credit. However, he also points out that at least it’s possible to get a loan at all, thanks to alternative credit reporting.
Building up more credit down the road
Once you have a more traditional loan, thanks to the information in your alternative credit file, you can start building a credit history that more lenders will accept.
You can even refinance down the road too. Or, get a better rate the next time you apply for credit.
Ely says the goal of his alternative credit reporting agency is to help those with thin files transition to mainstream credit building.
If you know you want to get a loan, but you have a thin file and you aren’t sure where to start, it’s possible for you to make the leap if you have a history of paying your bills reliably.
With the help of alternative credit reporting, you can find new ways to build credit. Even if you’ve never so much as opened a credit card account.
Interested in a personal loan?Here are the top personal loan lenders of 2020!
|Lender||APR Range||Loan Amount|
|5.99% – 19.16%1||$5,000 - $100,000|
|7.98% – 35.99%||$1,000 - $50,000|
|7.99% – 35.97%*||$1,000 - $35,000|
|99.00% – 199.00%2||$500 - $4,000|
|5.99% – 24.99%3||$5,000 - $35,000|
|7.99% – 29.99%4||$7,500 - $40,000|
|7.99% – 20.88%5||$5,000 - $50,000|
|15.49% – 35.99%6||$2,000 - $25,000|
|10.68% – 35.89%7||$1,000 - $40,000|
|9.95% – 35.99%8||$2,000 - $35,000|
|1 Includes AutoPay discount. Important Disclosures for SoFi. |
2 Includes AutoPay discount. Important Disclosures for Opploans.
Direct Deposit required for payroll.
Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.
3 Includes AutoPay discount. Important Disclosures for Payoff.
4 Important Disclosures for FreedomPlus.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
6 Important Disclosures for LendingPoint.
7 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
8 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.
Based on the responses from 7,302 customers in a survey of 140,258 newly funded customers, conducted from August 1, 2018 – August 1, 2019, 95.11% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
Personal loans made through Upgrade feature APRs of 7.99%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.