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Can You Really Build Credit Without Credit Cards?

In recent years, there’s been something of a backlash against the credit industry and the credit scoring [3] industry. Some consumers don’t like the idea of using credit cards, and they are getting rid of them.

Unfortunately, the credit industry is so ingrained in our financial infrastructure that eschewing all credit can be detrimental. It’s not just lenders that look at your credit history; insurers, landlords, and even some employers might have a peek at some version of your credit report.

As a result, participating in the credit industry is a necessary evil for many consumers. But what if you could build a credit file without using credit cards or other loans? That’s what alternative credit scoring is all about.

What is Alternative Credit Scoring?

One of the arguments for using credit scoring models [4] based on information in your credit file is that the way you handle your credit is indicative of how responsible you are in all things finance. For those who don’t use credit though, that seems unfair. You don’t need to have a credit card or a car loan to prove that you are responsible with your finances.

After all, many people with credit reports make their utility payments, rent payments, and other payments on time. They have respectable savings accounts, and never overdraw their checking accounts. All the same, though, they are considered a credit risk. This is where alternative scoring comes in.

Alternative models take a look at the non-credit financial behaviors that aren’t included in a more “traditional” credit score. FICO [5] has an alternative/supplemental model, called the Expansion Score, that takes into account some of these behaviors, including looking at bank account activity. Experian has started including rent payments on its credit reports. Alternatives like PBRC and eCredable will score you based on your non-credit payment history.

These alternatives to the traditional credit scoring model provide those who don’t want to participate in the credit card culture a chance to qualify for car loans and mortgages that they wouldn’t normally be able to get if all that was looked as a more traditional credit score.

Does Alternative Scoring Really Matter?

While it’s a nice thought — the idea that you can build a good financial reputation without high-interest consumer debt — it’s not exactly reality yet. It’s true that these agencies can help score you based on non-credit financial behaviors. However, lenders still aren’t using them widely. Instead of having your score from eCredable accepted at almost any lender, you are limited to the partner lenders that accept the alternative score.

Another issue is that you might have to pay a higher interest rate anyway. While you might be approved for a loan you wouldn’t otherwise get, you will likely have to pay a higher interest rate than someone with a “real” credit score would pay.

Finally, you usually have to pick up the tab if you want to use alternative scoring. FICO offers its Expansion Score to lenders who want to use it, but if you want your payments to be tracked and verified by an alternative reporting agency like PBRC or eCredable, you have to pay a fee. In some cases, you need to pay up to $90 or more, just to have a single report generated.

For now, alternative scoring can help, and it’s encouraging that at least one of the major credit bureaus is including rent payments in its reporting. However, real change in the credit reporting industry is likely to be slow in coming.

What do you think? Have you used alternative scoring before? Would you consider it, or is it just easier to play along with the way things are now?

(Photo: Images of Money [6])