What Is Alternative Credit Reporting and How Does It Affect You?

When you apply for a nontraditional loan, alternative credit reporting agencies (CRAs) are often used.

But what is an alternative credit reporting agency exactly?

And where do they get your information?

Let's start with what we know.

"Banks (traditional and online), mortgage loan lenders, auto loan lenders, credit card issuers, and student loan providers all use credit reporting agencies to determine if a borrower is eligible for loans or lines of credit," explains Xavier Epps, Founder and CEO of XNE Financial Advising.

This is pretty standard. When you apply for a credit card or a loan, the lender requests information about your credit history from one or more of the national credit reporting agencies (NRCAs). "There are three main credit reporting agencies: Equifax, Experian, and TransUnion," says Jared Weitz, CEO and Founder of United Capital Source Inc. "These three are what build and report your credit score and credit history."

The Big Three

A CFPB white paper gives us the following facts:

• The big three CRAs collect and maintain data on more than 200 million adults.
• They gather data from more than 10,000 sources.
• Monthly, these sources provide CRAs with information about more than 1.3 billion credit accounts or other trade lines.

"The Big Three collect information on our ability to manage financial obligations," explains Epps, "however, they are usually limited to loan obligations."

But what if you haven't had any mainstream loans or credit cards from banks, credit unions, or nationwide credit card issuers? If that is the case, you are likely struggling with access to mainstream credit. You are among the 1 in 10 American adults with limited credit history. Limited credit history means that the Big Three don't have enough information on you to formulate a credit score. 

When applying for a loan or line of credit with a company outside of the mainstream, alternative credit reporting agencies are often relied on to help vet loan candidates. 

Alternative CRAs

Experian and company aren't the only companies collecting information about you. There are lots of other alternatives vying for competition in the credit reporting world, collectively referred to as the "fourth bureau." They don't all collect the same information, however. "There are nearly 40 alternative credit reporting agencies, most of which offer more niche credit reporting information from tracking rent and utility payments to monitoring checking-account management and insurance consumption," explains Epps.  

What are alternative CRAs?

"Alternative CRAs are credit reporting agencies other than the three most widely known," explains Faith Stewart, finance writer at Credit Suite. She adds, "Most personal credit scores come exclusively from the big three, but in the world of business credit, there has been an increase in the use of other, alternative CRAs."

Alternative CRAs "are reporting agencies that generally focus on different types of accounts such as employment, housing, checking accounts, payday loans, and other types of accounts not included in a big three report," clarifies Joseph P. McClelland, III, a consumer credit protection attorney in Atlanta, Georgia.

The main difference between the Big Three and the various alternative CRAs is the type of accounts they report on, says McClelland. He adds, "When you look at your Equifax report, it will not have information on your checking accounts, for example. If your employer or your new bank wanted this information, they would need to pull a different credit report to find out."

"These agencies help the 'unbanked' or those with little to no credit gain credit," says Weitz, by using information alternative to that already listed in your standard credit history. "They determine an individual's credit by their history of paying everyday bills on time such as rent, cell phone, insurance and gas and electric."

What different types of information are they gathering? There are specialty information companies for all sorts of fields, from employee and tenant screening, to specialties for medical information when applying for insurances, utilities data, retail merchant data, and gaming data, like VIP Preferred, which collects information to help casinos and racetracks manage risk.

For our purpose, let's dive into those that collect and report mainly to lending and banking institutions. 

Check and bank screening

Banks and credit unions use these services to help decide whether they should cash a check for you or let you open a checking account. They want the following information:

• Unpaid negative balances
• Unpaid overdrafts
• Closed accounts
• If you were suspected of fraud
• If you have been a victim of bank or check fraud
• If you have previously had trouble opening or closing a bank account

Companies

• Certegy Check Services
• ChexSystems
• CrossCheck, Inc.
• Early Warning Services
• Global Payments Check Services, Inc.
• TeleCheck Services

Low income and subprime specialists

This group provides information about several things. Each company has its own sources, but these are common: 

• Short term lenders, like payday loans and installment loans
• Car loans
• Check cashing
• Rent-to-own history, like furniture stores
• Cable and telecom accounts, and other bill payments
• Credit unions
• Debt collection companies
• Subprime home lending companies
• Subprime credit card companies 
• Banks
• Retail and consumer finance lending
• Property records
• Court judgments

Companies

• Clarity Services (owned by Experian)
• CoreLogic Teletrack
• DataX (affiliated with Equifax)
• FactorTrust (owned by TransUnion)
• MicroBilt / PRBC

Supplemental

To help companies manage credit and fraud risk, the following companies sell supplemental information about you to possible lenders, etc:

• CoreLogic Credco
• Innovis
• LexisNexis Risk Solutions
• SageStream (subsidiary of ID Analytics, LLC)

These are just some of the specialty CRA categories. Check out more here. 

What kinds of lenders use them and why?

"Almost all creditors use alternative credit information in one form or another," remarks Weitz. "There are a variety of ways alternative credit information is used to determine a loan approval, but it is difficult for individuals to know what specific information a lender is using behind the scenes to determine your loan approval."

Many payday loan companies use info from alternative CRAs rather than the traditional ones. McClelland also adds that "Apartment complexes, banks, and employers will use different CRAs to find more information." This information is used to qualify (or disqualify) you from these housing or lending opportunities. 

So, is the use of CRAs good or bad? Does it hurt or help you? We got some expert advice on the subject: 

"It really depends on how your personal credit affects things," says Stewart. "If you have good personal credit, then the use of an alternative CRA that includes that in the calculation can only help you. If not, then it is definitely on the 'con' side."

On the other hand, Weitz tells us, "If you have limited or poor credit and are in need of a loan, working with a lender that accepts a score from a CRA is your best bet. If they are willing to accept your report based upon bill payments, you will have a better chance of being approved. From here you can grow your credit score by paying the loan back with on-time payments.”

Epps agrees, "A benefit of lenders using alternative credit verification sources is that you can expect an alternative and improved credit score that takes into consideration other financial behavior such as your ability to make rent, cable television, internet and other monthly payments on time." These are all factors that a normal credit score doesn't take into account, but alternative CRAs do. If you are already making regular payments for everyday things like utilities and internet, these can work in your favor. However, this can also hurt you. McClelland warns, "If you have an eviction or bounced checks in the past, this may not show on a typical credit report but show up on a specialty report."