How Does Alternative Credit Reporting Work Exactly?

alternative credit reporting

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 the 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.

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LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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