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Getting credit where credit is due

Amy Scott May 23, 2008


Tess Vigeland: There are a few basic personal finance concepts that we try to hammer into your skulls pretty much every week: Save money for retirement, get rid of debt, pay attention to your credit score. But what if you’re so good about not accumulating debt that you don’t even have a credit score?

Some 50 million people in the U.S. don’t, and that can make it tough to navigate this modern financial world. Marketplace’s Amy Scott reports on efforts to establish alternative credit scores.

Amy Scott: This is the car Sherri Smalley was beginning to think she’d never own:

Sherri Smalley: And it’s a nice little car.

Smalley is a young 51 years old, with tattoos on both arms and a two-tone hairdo. She runs a golf course restaurant in Phoenix. After a recent car accident, she decided to trade in her ’86 Camero for something a little safer. But her bank turned her down for an auto loan.

Smalley: The reason they gave me was that I didn’t have any credit score at all. Not bad credit, just no credit. So they wouldn’t give me a car loan.

Smalley tried several dealers. Just one would give her a loan, with a 25 percent interest rate. She passed.

An estimated 50 million people in this country are in the same boat. They have what’s called a thin credit file, or no file at all. Many are young people and new immigrants who just haven’t had the chance to establish credit. Smalley just never thought debt was a good idea — until she needed it.

Smalley: I had always thought that if you worked hard and saved money and bought the things you wanted, you were doing good in life. But come to find out at 51 years of age that because I had never established any credit by buying on credit, that I couldn’t get credit. So I was pretty much not going to be able to have a car at all.

Then Smalley found out about a program at a local credit union. Traditional credit scores rely on a credit history. But by proving that she’d paid her basic bills on time — rent, life insurance, cell phone — Smalley was able to get an alternative credit score: a respectable 653.

Smalley: And I was able to go out and buy absolutely the car of my dreams. It’s a little ’01 PT Cruiser that is just gorgeous and it fits me just perfect.

Smalley’s credit score came from a company called Pay Rent, Build Credit, or PRBC. Founder Michael Nathans thought it was unfair that mortgage payments were reported to the major credit bureaus, but rent didn’t count. Now, customers can report all kinds of bill payments. PRBC verifies them and provides the data to lenders.

The company is known as an alternative credit bureau. But Nathans bristles at the term.

Michael Nathans: Rental, cable, electric, phone, all these payments have for so many years been called non-traditional or alternative type data, when in fact there’s nothing non-traditional about it. It shouldn’t stigmatize anybody.

The mainstream credit industry is catching on. Fair Isaac is now using PRBC’s data for it FICO Expansion Score. A few months ago, Experian launched what it calls an emerging score. It’s based in part on payments to book- and CD-of-the month clubs.

Zaydoon Munir is head of marketing and product development at Experian. He says the new score is helping lenders reach what the industry calls the underserved.

Zaydoon Munir: In looking at the risk policies of our clients, 20-25 percent of those consumers who otherwise would have not been served by these mainstream lenders would’ve qualified.

Munir won’t say who those lenders are. But big names like Citigroup and Citizens Home Loan are starting to use alternative data to make loans.

Jennifer Tescher directs the nonprofit Center for Financial Services Innovation. The group funds credit bureaus like PRBC. Tescher says lenders have estimated that reaching out to underserved consumers could generate anywhere from $6 billion to $45 billion in loans per year.

The subprime mortgage collapse may have set the effort back. Lenders are naturally more cautious these days. But Tescher says they’re also open to finding better tools to measure credit risk. And she says it’s a mistake to assume that people with thin or no credit files are subprime borrowers.

Jennifer Tescher: In fact, it appears that a majority of them are not subprime. And it’s also imporant to remember that that not all subprime borrowers are bad. What we saw in the mortgage markets was incredibly shoddy lending practices. It wasn’t we had bad data, it was we chose not to ask questions.

Some are asking questions about how good these alternative credit scores really are for consumers. Privacy advocates worry more data is being collected that could fall into the wrong hands. Then there’s the added temptation for even more consumers to get overextended.

In Phoenix, Sherri Smalley is grappling with the fact that, for the first time in her life, she’s in debt. Since the car loan came through a few months ago, she’s applied for a few credit cards. She’s thinking about buying a condo, now that she qualifies for a mortgage. But she says she’s sticking with the car payment for now.

Smalley: It’s almost scary. But it’s a fantastic feeling paying that bill every month. It just is so wonderful to know that someone trusted me that much that they gave me this car knowing that I would pay for it every month.

And so far, she has.

I’m Amy Scott for Marketplace Money.

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