Payday Loan Payments Among Proposed Criteria For Companies’ Alternative Credit Scoring
By Desmond CarlislePayday Loan Writer
How easy is it for a person who bought a house with cash to get a credit card? Not easy at all, according to the Chicago Sun-Times.
Arjan Schutte, whose immigrant father paid bills on time for decades, only decided to get a credit card so he could order plane tickets online.
"He was denied by everybody," said Schutte, Associate Director of the Center for Financial Services Innovation in Chicago, speaking before a panel on alternative credit scoring.
Lenders are starting to realize that potential borrowers often experience trouble getting loans because they lack traditional credit information.
While normally lauded as admirable habits, making purchases with cash and avoiding consumer debt don't build a conventional credit history, which means consumers might have to overpay for home loans and other important purchases. With that in mind, companies are exploring other gauges — even going so far as to include payday loan payments — when evaluating consumer credit.
The chart at left shows just how greatly one's credit score can affect the interest rate granted by a lender — and why it is cause for such concern.
One way to allow consumers to build credit is to count regular, on-time payments like rent, phone and utilities towards a credit score, said Michael Nathans, founder and chairman of PRBC, a Washington-based credit bureau that provides alternative scoring.
"Payments for rent and gas are indicators of one's ability and willingness to make recurring payments on time, but they are not reported to the traditional credit bureaus," said Nathans, who said PRBC is close to signing an agreement with a top U.S. automaker that wants to use PRBC data.
PRBC already has in place a "memorandum of understanding" with the National Association of Mortgage Brokers to help educate association members on how to offer PRBC service to prospective customers.
Experian, one of the nation's three traditional credit bureaus, is looking into the use of alternative credit scoring data as well. The company is considering looking at payments on payday loans, rent and utilities as a way of building credit history, in addition to traditional measurements.