Lenders typically examine applicants' credit data to determine their eligibility when applying for a loan. This involves assessing their credit history, such as their payment behavior on other loans and debts over time. However, many lenders also consider alternative credit data, information not typically included in credit reports, to determine loan eligibility. For some individuals, this can present new opportunities for obtaining a loan.

What Is Alternative Credit Data?

Alternative credit data is any information outside of what is typically reported on your credit report. That could include:

• Utility payments
• Cellphone payments
• Rental payments
• Bank account cash flow

Lenders may use this information to better understand your financial management skills. This can be very valuable to you, as a consumer, if you do not have a lot of credit history. It is challenging to build credit if you cannot access it – but you cannot access it without having a credit history.

With this type of data, lenders can find out if you make payments on time and whether you can manage your existing debt in a positive manner. That could show how well you'll navigate new loans or credit cards they offer you.

How Is Alternative Credit Data Used?

Lenders use alternative credit data like they may use other information about you. They gather information, determine what it shows about your use of money, and then base lending decisions on this information. Typically, lenders will use this type of data and other information, such as your income and employment history, to help them decide.

Here is how it may work. You hope to open a credit card from a lender, and you do not have any credit history, though. The lender cannot base a decision on your credit score because you don't have one or it is very low.

They may instead be willing to include other information about you, such as your long history of making your cellphone payment on time or your consistent payment of rent. That data can show if you make payments on time. They can approve your credit card application even if you have a low credit score.

Not all lenders use this information, and it is up to the lender to determine if they will consider this added data type. Some lenders do not do this, and others will encourage you to provide this data so they can use it.

Examples of Alternative Credit Data

Lenders determine what type of data they are willing to use. Some examples that may qualify include:

• Rent: Your rental payments can prove to lenders that you are reliable in making payments each month.
• Bills: This could include your phone bill, utilities, insurance, and cell phones.
• Cash flow: How much information do you earn each month? How much money do you spend each month? Your bank statements help here.
• Other assets: This could include any bank accounts and other assets you own.
• Side work: If you are doing any side hustle, that could help indicate your financial stability, and some lenders will consider this a source of income.

Benefits

For those who do not have a lot of credit history, using alternative credit data could help show lenders that you are a reasonable risk. It can help with the following:

• Establishing that you make payments on time.
• Providing insight into your income.
• Demonstrating your ability to manage your money.

Over time, you can build your credit score and credit report history. You may not have to worry about using this data type down the road. The key here is to make payments on time as agreed to build your credit.

Drawbacks

There are some potential drawbacks to the use of this type of data. Specifically, if you do not have this type of data, it could make it hard to prove to lenders that you have the financial means to make payments.
Also, not all types of loans and credit card lenders will use this data type. If you want to have this information used in deciding your ability to make payments, you'll need to find a lender willing to consider this data.