A credit report is a detailed view of an individual’s credit history. Credit reports are created, prepared, and updated by credit bureaus or credit reporting agencies. Credit bureaus use the information in credit reports to determine the credit worthiness of a loan applicant.
How do lenders use credit reports?
In the United States, there are three main credit bureaus: Experian, Equifax, and TransUnion. When a customer applies for credit from a lender, the lender obtains a credit report from the credit bureau to highlight past trends and activity on loans the applicant has had in the past to determine whether they will approve the applicant for credit. The credit report can include detailed information such as: payment history, credit utilization, length of credit history, new credit inquiries, and a mix of different types of credit.
Lenders are able to find indicators within the credit report that aid them in predicting whether the borrower will repay the debt borrowed. It is important to note that due to the Equal Credit Opportunity Act (ECOA), a lender may not discriminate based on race, color, religion, national origin, sex, marital status, or age (assuming the borrower is old enough to enter into a contractual agreement by law).
Many lenders have used the same traditional credit data for many years to determine credit worthiness. In the last few decades, alternative credit data has emerged in popularity to allow lenders to break the traditional mold and obtain new avenues to sift through the good and bad credit applications.
What is Alternative Credit Data?
Alternative credit data simply refers to data that is not included in the traditional credit report by the three main credit bureaus. This includes alternative financial services, consumer-permissioned data, payments on utilities and rent, as well as public records. Many lenders have found that alternative credit data can help supplement the traditional credit data found in a FICO®️ credit report. Other lenders do not use the FICO®️ credit report and focus solely on alternative credit data for their underwriting of applications. Lenders in this category usually offer poor credit loans such as short-term installment loans. This holds true as well for those who are new to credit and are unable to obtain credit from traditional financial institutions such as banks and credit unions. In this way, applicants are able to show they will be responsible borrowers through other means than their previous credit history, or the lack thereof.
For even more detailed information on how to obtain installment loans with poor credit, visit our Alternative Credit Data page.