To secure a loan, you need a good credit history. However, there are people like fresh graduates, small business owners, gig workers, or freelancers who have a standard credit file, but manage their money quite well. The traditional credit scoring is based on credit cards, mortgages, and previous loans. Now there are alternative credit scoring methods to allow more people to borrow money who \have little or no credit history. Lenders now use other kinds of data, like utility bill payments, employment history, and behavioral patterns, to decide whether to give a loan or not. This gives them a good idea about the borrower’s financial health.
What Is Alternative Credit?
Alternative credit means relying on non-traditional information like utility bills or digital payments for lending, rather than bank histories. This approach gives better access to credit to people who deserve it. Alternative credit scoring is often powered by machine learning (ML) to help lenders make fairer and faster loan approval decisions at scale.
Traditional Scoring vs Alternative Scoring
You will find a lot of differences between the two methods of scoring. Traditional scoring collects data from credit bureau files, credit card usage, loan history, and repayment data. Alternative scoring, on the other hand, uses digital intelligence, behavioral metadata, the internet, and smartphone interaction patterns. The traditional scoring focuses on credit history for loan assessment. But alternative scoring uses real-time digital data, interaction signals, and behavioral patterns.
Loans are processed in batches using traditional scoring, whereas you can get real-time results with alternative scoring. In the traditional scoring system, people without a long credit history have a minimal chance of getting a loan. However, in the alternative scoring, people practicing good financial management, but not having a long credit history, also get a chance to get loans. The alternative scoring method uses a broader spectrum of data to evaluate a borrower’s loan application to improve consumer coverage and give a more accurate loan approval decision.
Utility Bills For Getting Loans
Among the various alternative credit scoring methods, utility bill payment is a popular one. Utility bills include the recurring expenses in a household that a person has to pay every month, such as gas, water, electricity, internet, and telecommunications.
The lender will look at the borrower’s history of paying utility bills on time. They collect data from utility provides or credit reference agencies that track the utility bills records. Most utility companies won’t automatically give consumer reports. So, the lender needs to get in touch with services that offer access to bank account information and utility payments. This will then be added to your credit file, which will improve your credit score. There are third-party reporting companies as well that can get the utility bill payment information.
Utility bills are not included in the traditional credit report. But if a person pays the bills on time, it shows that the person is managing finances well. If a person doesn’t have credit cards or loans, the utility payment record will help to get a loan. This alternate credit scoring is very helpful for tenants having no mortgage, new graduates, low-income people with consistent payment history, and immigrants with no credit history.
How To Avoid The Negative Impacts Of Utility Bills?
If you fail to pay your utility bills on time, then it lowers your chances of getting a loan approved. The unpaid bills are forwarded to the collection agency. Your non-payment status will appear in the credit report and remain there for about 7 years. This will seriously hurt your creditworthiness seriously. However, the good news is that you will get some time to straighten things out. You may get several months to pay before your credit report becomes bad. But if you consistently make late payments, the pattern will appear in your credit report.
Conclusion
According to the credit bureau, 26 million Americans still remain credit invisible, that is, without a credit history. Alternative credit scoring can bring these people into fair treatment. It has transformed the financial system. It has moved towards a more inclusive and fairer model, allowing transparency and maintaining accountability. More borrowers who were previously invisible to the financial system are now eligible for loans. Lenders can give a more precise financial health assessment of the borrower using the alternative credit scoring method.
