Alternative Credit Can Be Built Through Rent or Utility Payments

Having a credit history is important in the financial world. Having a good credit score tells lenders that you are responsible with money, and you will be more likely to receive loans or even a job. But what if you don’t have a credit history? If there’s no history, it will be difficult to get a loan. If your credit history is virtually nonexistent, your credit score will be low, and if you are approved a loan, the interest will likely be high. One way to start your credit history is to be an authorized user of a credit card, but of course this is also a way to damage your credit score if you run up an exorbitant bill. There is another alternative way.

Alternative credit is a way to build credit by using non-traditional means. In determining your credit score, FICO uses five basic criteria. 35% of the score is payment history (credit card bills, loans, mortgage), 30% is current amount owed, 15% is your credit history (how long you’ve had credit card accounts), 10% is the different types of credit you’ve used (installment credit, revolving credit, consumer finance, or mortgage), and the final 10% is recently opened credit accounts. The end number (ranging between 300 and 850) is derived by a secret formula only FICO knows, but these five criteria are important factors in determining a “good” or “bad” credit score. If you have few or no credit cards, mortgages, or bank loans, you have limited credit history, and your score could be bad. If you choose to employ alternative credit, you can use your history of payments for non-traditional items, such as utilities, rent, child care, and even your cell phone. By showing proof of timely payments in these non-traditional categories, you will show you are responsible with paying off debt, and lenders can then use this information as a starting point for future loans, mortgages, etc.

The main difficulty of using alternative credit is the information itself. Showing the history of your rent payments could be a good indicator of how you would handle a mortgage, and showing utility payments could be an indicator of how you would handle credit card debt. However, there aren’t many large landlords, so lenders don’t have much comparable data when it comes to rent payments. With utilities, some states restrict their release of information, so you might not be able to use that at all. If you’re applying online for an alternative credit line (some bureaus include “Pay Rent, Build Credit” and “TransUnion”), there might also be fees involved in the verification of your bill payments. Nevertheless, if you don’t have credit cards or any notable credit history, alternative credit might be a good way for you to build trust and obtain future loans.

David Pilley

David Pilley

David Pilley is a May 2010 graduate of the University of North Carolina at Chapel Hill, with a B.A. in communication studies and a creative writing minor. He is a native of Raleigh, North Carolina.

He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.

Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.

In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.
David Pilley

Latest posts by David Pilley (see all)