No Credit Report, No Problem

In an attempt to control their risk since the financial crisis, many lenders have focused their attention on potential customers with the very highest credit scores and most pristine, exhaustively documented payment histories. The trouble with this strategy is that every institution knows who these customers are and, what's more, most of these people already have a mortgage, a car and all the credit cards they need.

In the last six to 12 months, however, there's been a shift among lenders. Analysts say they now seem more willing to reach beyond this rarefied group.

"They want to keep their good customers and make the pool of potential customers grow, but in a risk-sensitive way," says Aite Group analyst Christine Pratt.

To this end, lenders have become increasingly interested in and more willing to use so-called alternative credit data to find good customers they might otherwise overlook. (Alternative data can include everything from rental payment history to mobile phone bills to years at the same address.)

"There's a realization that they are all targeting the top of the market and it's very saturated, that it's very difficult to get these people to change institutions," says Mike Mondelli, chief executive of L2C Inc., a provider of alternative data for credit scoring. "The economy, while not great, has improved. And they need to grow their business."

Aside from the tens of millions of people rebuilding credit after the financial crisis who may be good customers, there are millions of people without enough data to qualify for a traditional credit score who are routinely dismissed as bad risks. These people might include new immigrants, young consumers or those who don't use credit cards. FICO estimates that 25% of the U.S. adult population, or about 50 million individuals, lack enough traditional credit data to generate a FICO score. Yet they could be worthy customers.

Of course, using alternative data is not novel — credit scoring agencies and financial institutions have long sought and used new metrics. But vendors are responding to the new urgency among lenders with additional tools and services.

Last year, Experian (one of the big three credit scoring agencies along with TransUnion and Equifax) bought RentBureau, the largest credit bureau for the multifamily industry. Earlier this year the company incorporated positive rental data from RentBureau into its traditional credit file. In the past, only negative rental information was available from collection agencies.

According to the National Multi Housing Council, there are nearly 96 million individuals renting who don't get the "credit" they deserve incorporated into their credit scores. "Rental history is the most important factor in determining mortgage payments," says Brannan Johnston, vice president and managing director of RentBureau.

Mondelli says his company recently completed a redevelopment of its scorecard to include positive and negative information on rental check writing and utility payments. FICO, meanwhile, has the FICO Expansion score that includes demand deposit data, phone and utility data, membership club obligation, judgments, liens, bankruptcy and other positive and negative nontraditional data. FICO is always adding to its repertoire of products, says Bradley Graham, senior product management director at FICO.com.

What's critical is that these efforts are reaping rewards for lenders — and consumers, for that matter. Johnston says that since adding positive rental data, 45% of high-risk or unscoreable consumers lifted their credit scores to 600 or higher. Meanwhile, Mondelli says that on average, L2C clients approve 15% more accounts without increasing their risk levels. And Graham notes that 75% of consumers who don't generate a traditional FICO score do generate a FICO Expansion score.