Renters can build credit through new method
Renting instead of owning your home might seem like flushing money down the drain, but paying that expense and other bills on time can help you build credit if your current score doesn’t qualify you for a mortgage.
Fair Isaac & Co., the company that compiles the FICO credit score, has developed a new method of gathering credit information for an ”Expansion Score.”
Such nontraditional consumer-credit data include deposit-account records, layaway purchases and, whenever possible, utility bills.
Under the new program, Fair Isaac would include information from Pay Rent, Build Credit, a community development service Web site that collects consumer data on rent and other recurring bill payments.
You can enter your information into a Web file, which PRBC charges a fee of $15 to $20 to verify, or set up an automatic bill-payment system through your bank or credit union and have the records sent to PRBC.
- Source: Akron Beacon Journal, Mar. 13, 2008
Sponsor: Credits Secret Bible
Credit scorers find new ways to judge you
Don’t be surprised if a lender wants to know if you pay your rent on time or bounce checks before it will let you borrow money.
For many years, loan approvals were determined largely by borrowers’ credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories.
Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans.
The financial-services industry began this push so it could lend more to the estimated 50 million Americans - including many immigrants, young adults and seniors - with little or no credit history.
But as the economy slows and default rates soar for home mortgages, more lenders are using these same tools to evaluate the credit-worthiness of the broader population.
Today, credit bureau Experian Group Ltd. plans to announce an alternative credit score to help lenders get a better picture of how people with little or no credit might handle a loan.
Competitor TransUnion LLC rolled out a similar product this past summer, while Fair Isaac Corp., developer of the widely used FICO score, broadened its Expansion scoring system in November to include more information about monthly rent and utility payments, among other data.
Before the subprime-mortgage crisis, most lenders used the Expansion score to get more business, says Tom Quinn, vice president of global scoring solutions at Fair Isaac.
"Now, we are seeing more lenders interested in using this as an additional tool to mitigate the risk in their portfolios - for people in the gray zone’ or just to do a safety check," he says.
All this means that consumers should pay closer attention to whether they pay bills on time or write bad checks.
More lenders will study such factors when they price loans or reset credit lines on existing customers, particularly those with lower credit scores, says Arjan Schutte, associate director at the Center for Financial Services Innovation, a nonprofit Chicago affiliate of ShoreBank Corp. that provides advisory services to the financial-services industry.
Yet the new scores could be good news for those who pay their bills promptly but don’t have established credit histories.
When Rich McEldowney of Bozeman, Mont., and his wife, Phoebe, applied for a mortgage in February 2007, their mortgage broker told them that his wife didn’t have a credit score anymore.
Among the reasons: They had paid off their auto loan several years ago, and she didn’t have any credit cards. In fact, except for a credit card that Mr. McEldowney uses for his job as an ecologist, he and his wife don’t use credit cards, preferring instead to use their debit cards and pay for things with cash or checks.
“It seems like the more debt you have, the easier it is to get credit,” says Mr. McEldowney. “We don’t have credit cards, and we try to be responsible with our debt.”
On their broker’s suggestion, they turned to Pay Rent, Build Credit Inc., also known as PRBC, a credit bureau in Annapolis, Md., that specializes in collecting rental and bill-payment data. It studied Ms. McEldowney’s history of paying other household bills - such as rent, telephone, and auto insurance and her daughter’s day-care bills.
She ultimately received a decent credit score. As a result, the McEldowneys were able to qualify for a 6.5 percent rate on a $350,000 mortgage - roughly half a percentage point lower than the rate that Mr. McEldowney says he would have been able to get on his own.
- Source: Summarized from the Wall Street Journal, Mar. 11, 2008
