Today we’re going to continue with our special serious on credit. Now that we have covered your credit report and credit scores, I am going to tell you about a form of credit that you may not have heard of. It’s called alternative credit and it is actually what I used to purchase my first home. I admit I had never heard of it until my mortgage broker brought it up. I was a couple of years out of bankruptcy and had made remarkable improvement to my credit score, but the lenders wanted to see more from me. I can honestly say had it not been for alternative credit I would not have been able to purchase a house.
Alternative credit is an option available to borrowers with little to no credit history. Alternative credit is usually in the form of a letter from the credit company that holds the account that does not normally report to the credit bureau. Examples of alternative credit are cellphone accounts, cable television accounts, automobile insurance and even cancelled rent checks, however, they all need to be paid on time in the last 12-24 months. I know what you are thinking: Don’t these accounts already report to the major credit bureaus? Yes they do, in the form of collection accounts when you owe them money. They rarely report when you pay on time and they are not obligated to do so. Reporting credit and payment information is totally a voluntary option, however, just because it is not reported does not mean it is not valuable or useful.
Alternative credit is an excellent way for someone with very little established good credit to prove their creditworthiness to lenders. It’s all about building a case for yourself to the lender. This form of credit is also good for foreign nationals as they may have not been in the United States long enough to establish a credit history.
Banks make a distinction between loan applicants with no credit history and those with bad credit history. Non-prime lenders are usually the only source of mortgage financing for borrowers with bad credit profiles, whereas homebuyers with little or no consumer credit history can often obtain home loans with alternative credit features from banks.
Another example of a borrower who may need to use alternative credit would be someone who has filed a bankruptcy and never re-established any credit accounts. Sometimes after a bankruptcy people feel it is better to pay cash for everything and not get any more credit accounts. I know that is exactly how I felt. This is not true because it is important to re-establish your credit after the bankruptcy.
Some examples of Alternative credit are:
Housing: Rent, lease or mortgage
- Utilities: Electric, gas, water, phone (mobile or land), cable, internet service.
- Revolving accounts: Bank secured credit cards, unsecured payday loans
- Installment Accounts: Vehicles purchased from a buy here pay here lot, all insurance types with the exception of payroll deduction, leased furniture, appliances or durable goods, layaway payments made monthly, condominium/homeowner association dues, timeshare maintenance, gym and physical therapy payment plans, child and daycare with regularly scheduled payments, parking with regularly schedule payments, self-storage, subscriptions and memberships with regularly scheduled payments.
So you see you can build your alternative credit profile with a wide variety of payments.
Given today’s economic climate, there is increasing support for the use of alternative credit. There are many Americans who don’t have enough traditional credit history with three major credit bureaus to obtain a credit score. This group includes young adults, such as my 22-year-old son with little to no access to traditional credit. I have built a profile for him using his cellphone bill, his rental history as he just obtained his first apartment this year, and his gym membership. He is well on his way to establishing his credit. Other individuals that you may know who could benefit from this are recently divorced or widowed individuals with little to no credit in their own names, newly arrived immigrants, individuals with previous bankruptcies, and individuals who consciously shun the traditional banking system.
The system that I used to build my son’s account is PRBC. You must become a member and it is free to do so. All you have to do is register at least 3 monthly-billed accounts and be sure to pay them on time. This is not a sponsored post but feel free to go to their website https://www.prbc.com for more information.
Thank you for hanging in there with me for this credit series. There is one more installment to come. Please feel free to share this information with anyone you know that it will benefit.