What Is an Alternative Credit Score?

When an individual applies for a loan or credit card with a bank, the bank pulls and evaluates his FICO score before approving his application. FICO scores are calculated by the Fair Isaac Corporation and are the industry standard for credit scoring. Unfortunately, not everyone has a FICO score. This can lead to responsible consumers being turned down for loans. In cases where a FICO score isn't available, an alternative credit score may take its place

Facts

All credit scores are based on the information present within a consumer's credit report. Any past credit cards, loans, bankruptcies, judgments and collection accounts are included on a credit report. Lenders evaluate both an individual's credit record and her FICO score when determining the consumer's risk level. Some individuals, such as recent immigrants and college students, may not have a FICO score due to lack of a credit history.

Types

The FICO score isn't the only credit score that banks can use to evaluate a consumer's creditworthiness. Consumer credit scores provided by the credit bureaus and third party credit report providers offer an estimated FICO. Lenders may also consider Auto Industry Option Scores, which calculate a credit score based primarily on an individual's past payment history on his auto loans. Bankruptcy risk scores are also available to lenders to determine how likely a consumer is to file for bankruptcy based on his past credit information.

Considerations

The Fair Isaac Corporation, in an effort to more accurately assess risk and allow individuals to quickly build a credit history, offers an alternative credit score for consumers without a FICO score. The alternative credit score takes into consideration payments to creditors that don't normally report to the credit bureaus, such as landlords and utility companies. Another company, First American, provides alternative credit scores to banks based on non-traditional credit information.

Significance

According to USA Today, individuals who lack traditional FICO scores often turn to high interest payday loans due to their inability to obtain bank loans. High-interest, short-term loans present a danger to the consumer since the inability to repay the debt can lead to lasting credit damage. Alternative credit scores prevent this scenario by giving banks the information they need to lend to those without a traditional credit history. The banks also benefit by attracting new, responsible, customers.

Misconceptions

Alternative credit scores should not be confused with alternate credit scores. Alternative credit scores offer individuals with a limited credit history but good debt management skills the opportunity to obtain bank loans. Alternate credit scores are a method by which an individuals creates a new credit file for himself by applying for credit using any nine digit number other than his Social Security number. According to the Federal Trade Commission, building alternate credit profiles is fraudulent and illegal.