Non-Traditional Credit Scoring: Wot’s All This, Then?

2000 was the year to sell your house.  Thanks to an insanely inflated housing market, and an algal-bloom of sub-prime lenders – one would almost have had to fill out one’s mortgage application in crayon to not qualify for a home loan.

Almost.

Credit scoring – that number between, say, 300 and 850, that says, “pick me! pick me!” – still put a hitch in the giddy-up for many looking for home loans, especially consumers with terminally bad or, alternately, no credit scores to speak of.

Until recently, credit scores were the best way to get the attention of lenders in the housing market.  It mattered little how long you’d lived in the same house or apartment, how long you’d held your job, or how regularly you paid your phone and cable bills on time.  Your credit score – that 300 to 850 number – was the primary number used either for or against you, and the only factors contributing to it were performance on revolving loans like credit cards and high-ticket non-revolving loans like car loans and previous mortgages.

This effectively put individuals without credit cards, or without extensive credit history (i.e., young students, minorities), at a disadvantage in the heady world of real estate.  This also effectively put thousands of individuals out of the reach of lenders who might be able to turn a profit out of these mathematically risky individuals.

Enter the realm of non-traditional credit scores.  These are scores that eschew solely using traditional numbers and instead combine information like rental history, job history, and bill history in the hopes of painting a better portrait of these consumers as potential borrowers, and more to the point, re-payers.

This is great news, of course, for folks not usually served by the mortgage industry because they can’t get a foothold with their sub-prime credit scores.  Non-traditional credit scoring provides these consumers the opportunity to develop a credit history without accumulating credit card debt.

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In order to present mortgage lenders, et al, with a better-rounded picture of consumers, are companies like Atlanta-based RentBureau, unique in the market as one of the first real-time, online system providing apartment owners and managers with accurate rental histories of applicants.  “Effectively,” said Chief Executive Officer Harold Solomon, “we’re allowing people to build a good, solid credit history simply by paying their rent.”

It’s a system that could prove pretty influential.  Every 24 hours, RentBureau collects rental payment information from owners and managers in its network.  This data is immediately integrated and made available to participants through a secure, proprietary online database.

Of course, economists, financial analysts, and collectors in the accounts receivable management industry give conflicting opinions regarding what are known as “unscorables” in the market.

“Traditional ways of establishing credit history are still the best,” wrote MSN Money financial advisor Liz Pullman-Weston.  “They’ll cost you less and ensure you access to a broader array of potential creditors.”

There are also questions as to what effect including non-traditional items like rent, job history, and bill history into a credit history will have on the accounts receivable management industry.  “From a debt purchasing perspective, an artificially high score might make a portfolio seem more attractive, and could raise the price higher than what it should be,” said a poster on insideARM.com’s discussion forum.  “For buyers (or even sellers) that rely heavily on a score-based portfolio analysis, I could see where that might bring trouble. After all, most debtors will continue to pay their rent even though they pay nothing else -they have to have a roof over their heads.”

Traditionally, there is a hierarchy in regards to what and when consumers will pay debts.  Debtors will often forgo credit card payments and medical bills to pay rent and utilities.  Solomon sees this as an unfair dichotomy, though.  “The numbers, of course, need to be taken into context.  You wouldn’t use someone’s rental history to see how they’re going to pay on their Visa card necessarily.”

The non-traditional credit scoring industry is still finding its legs and trying to establish inroads with the Big Three of credit reporting: Experian, TransUnion, and Equifax.  Yet now, with the housing bubble dissolving into a soapy mess, might be the time when non-traditional credit scoring stops seeming so, well, non-traditional, and starts being part of the mainstream.