Unless they are in trouble, most people don’t wake up in the morning thinking about credit. Not even me, and I’ve spent much of my career immersed in it. But for most people, credit is an afterthought, and that’s unfortunate given the impact it has on our lives. Credit is now at a crossroads. It’s evolving right in front of us and that could mean real changes in the way we interact with it. Alternative credit is something we’ll all need to think about, though perhaps not first thing in the morning.

Before I joined eCredable, I spent the prior 7 years at the credit reporting agency Equifax. I got up close and personal with the credit ecosystem, both from the perspective of the creditor as well as the consumer. In my capacity as President of Equifax Personal Information Solutions, I worked with a team of people to create a variety of products targeted at helping consumers understand and navigate the complexities of the credit system. It’s a topic that requires the development of thoughtful and deliberate products that meet the needs of the infrequent credit shopper.

When you read the extraordinary amount of information that is written daily on the topic of credit, from the perspective of the creditor and the consumer, there’s a never-ending discussion on the relevance of credit to our everyday lives. Is alternative credit relevant to the way we conduct our daily financial lives? Now, more than ever, the answer is a resounding “Yes,” and here’s why.

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Traditional credit originates with the national credit bureaus (Experian, Equifax and Transunion) and consists of the payment information you make for repaying debt, like credit card balances, car loans, and mortgages. It also includes negative information like collections, liens, and bankruptcies. It has been around for quite some time. Like any new source of information, it took awhile for credit reporting and credit scoring to gain acceptance across the entire financial landscape. Understanding that the pace of change is highly correlated to the pace of technological advancements, it’s no surprise that automating the decisions associated with credit has been one step behind on this journey. Even though businesses have been able to use credit information in every facet of their decision making processes about consumers (their customers), they never seem to have enough information to further refine their ability to make financial risk based decisions. As the Great Recession exposed the risky lending practices of many lenders, part of the backlash includes a new focus on finding new sources of information to make more informed decisions.

Credit bureaus refer to information that is not contained in a consumer credit file as “alternative data.” In the context of consumer credit, it just makes sense to refer to this same information as “alternative credit” when you consider that this alternative data will be used for credit-related decisions. But why is this data “alternative” in the first place? Why can’t the credit bureaus get all this information housed in the same databases as the information used for “traditional credit?” It comes down to two simple but important business reasons: information availability and compliance with the Fair Credit Reporting Act (FCRA).

[Related Article: Free Consumer Reports: Nationwide Specialty Agencies]

By information availability, I mean the ability and desire for businesses that have payment information about consumers to report this information to the national credit bureaus. If there’s nothing in it for them, why go through the time and expense to share this information? It takes people and technical resources to report information to the credit bureaus. The information has to meet a significant number of minimum requirements for the credit bureaus to accept the information (the keys are quantity and quality). In short, you can’t just throw numbers out there and hope they stick.

By FCRA compliance, I mean the legal obligations that the Fair Credit Reporting Act (as well as FACTA, the Fair and Accurate Credit Transaction Act of 2003) places upon data furnishers. (Data furnisher is the name credit bureaus give to companies that provide data to them.) If a business reports information to the credit bureaus, the business needs to be prepared to respond to consumer disputes. In other words, when a consumer applies for credit and he or she is turned down due to an incorrect piece of information that was provided by the data furnisher, the business needs to be prepared to manage a consumer dispute and the potential for a subsequent legal action against the business.

All this adds up to people, time, and money. If businesses can’t significantly offset the expense of providing data with insights that will help them run their business better and be more profitable, then there’s no reason to report data to the credit bureaus. But this doesn’t lessen the need for companies to understand alternative credit. Most businesses want more customers, but they only want more “profitable” customers. They don’t want to extend credit to someone they don’t think can pay them back as agreed. It’s just common sense.

Approximately 75 percent of the adult population in the U.S. has traditional credit. The remaining 25 percent of the population has to get by with alternative credit. Alternative credit is defined as “credit reports and credit scores developed from data sources not typically contained in the national credit bureaus such as rent, utilities, insurance, and other forms of payment.”

If you’re a business, your first question is “how reliable is this information in making risk decisions?” FICO answered this question in 2007 when it released the FICO Expansion Score™, which uses alternative data to produce a credit score. The company was able to demonstrate that the FICO Expansion Score is comparable in its predictive values as traditional credit scores when evaluating credit. The predictability of the score was extremely similar to the FICO Score all the way through the score range of 300-850, until the score reached 780 (in the higher end of the scale, and not very relevant to assessing people without traditional FICO scores). This is important information, since FICO sets the standard for credit scoring.

If you’re a consumer without a traditional credit history (often called “thin file” or “no file” in our world), you’re probably wondering how you can use alternative credit to your advantage. The easy answer is that alternative credit allows you to build a credit history based on things you buy, not things you charge, like utility bills, rent payments, cell phone bills and auto insurance premiums.

[Related Article: Specialty Consumer Reporting Agencies: Tenant History Reports]

The law’s on your side: the Equal Credit Opportunity Act (ECOA) already provides you with the ability to provide this kind of information any time you apply for credit, and the credit grantor must consider this kind of information when using credit related information to make a decision.

Most consumers don’t know about this law, and most creditors don’t want to enlighten them. Why? Creditors have no easy way of accepting and using this information in making risk related business decisions. Creditors are completely hooked on using automated credit reports and scores to make these decisions without human intervention. If a consumer shows up at their place of business with a shoebox full of cancelled rent checks, utility bills marked paid, and various other pieces of paper that proves they paid their bills on time, the creditor would have a lot of work to do to understand the value and validity of this information. (It’s a little like how creditors made risk decisions 50 years ago.)

So what’s a consumer to do? The goal of alternative credit bureaus (like eCredable and others) is to help consumers overcome this challenge. If a consumer wants to avoid going into debt to prove their creditworthiness, but still wants to demonstrate their creditworthiness, having the bills they pay routinely that are not reported to the national credit bureaus can be extremely helpful. For years, creditors have used Alternative Credit in mortgage underwriting. This same approach is being extended to auto loans and credit cards as well.

eCredable is one of the companies helping to address the market need, albeit from the consumer perspective. Experian has expanded its credit file to include rental payment information from some of the larger property management systems that are willing to share data. Equifax has long been in the employment and income verification business, and is looking to complement this information with alternative data. Every year, more companies recognize the need to verify credit worthiness with alternative data, and I believe their requirements for alternative data for risk mitigation purposes will grow exponentially over the next two decades.

Is it time for “Alternative Credit” to join the mainstream credit conversation? It’s long overdue.

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Image: CarbonNYC, via Flickr

Since May is Older Americans Month, I decided to write about a topic that’s become a real issue in America. It makes me sad to say this, but unfortunately, we live in a world where senior citizens are often the target of financial fraud — elder abuse is a serious problem to watch out for.

This is addressed to the children and relatives of senior citizens, but it isn’t meant to exclude senior citizens from the discussion. However, whether you take some of these steps on your own depends on the mental and physical state of your relative. You’ll have to make the call, but if at all possible, it’s important to have your relative participate in the policing of his or her finances. If that’s not possible, then it’s even more important that you take the initiative to protect your loved one.

According to the FBI, seniors are targeted because they often have nest eggs, they come from a generation that was more trusting, and they’re often too proud to report the fraud. Another reason the elderly sometime hesitate to report they’ve been ripped off? They’re concerned their relatives might see this as a sign of declining mental capacity and they don’t want to lose their independence. Smart and unscrupulous thieves know all this, and try to exploit it.

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There’s so much advice on the Internet about what you need to do to protect your elderly relative against fraud. When you discover fraud, it can all be scary and quite confusing, so the FBI has come to the rescue with a comprehensive, yet easy-to-read, list detailing the different types of fraud and how to prevent them.

The scams range from funeral and cemetery fraud to fraudulent anti-aging products. I suggest checking out this site so you can be more aware of the scams your loved one could be exposed to. The FBI has another page describing all kinds of Internet fraud that you should check out. These scams range from investment fraud to the Nigerian Letter or “419″ fraud.

One of the most common types of fraud against the elderly is stealing credit card information. The thief then goes on a spending spree and hopes no one, including the senior citizen, is looking out for this activity.

Here are a few simple steps you can take to make sure your loved one isn’t the victim of credit card fraud:

Talk to your relative about email scams: You can’t be around your relative constantly, so take the time to explain why you should never give out your credit card number to buy a product that’s sold via email. These scams often promise a great product — anti-aging, perhaps? — but they need your credit card information. This type of scam also happens via phone.  Seniors get a call and they’re offered a new product that promises youthful energy. Once they have your loved one interested, they ask for a credit card number to seal the deal.

[Related Article: Act Fast: A Hotline for Elderly Financial Fraud Victims]

Keep an eye on caregivers: Maybe your mom is still at home and has home healthcare a few days a week. Or maybe she’s in a nursing facility and there are nurses and various medical assistants everywhere. Hopefully, your parent is exposed to professionals who are trustworthy. Just keep in mind that there are way too many reports of caregivers using the credit card of the people they’ve sworn to take care of. It’s horrible that someone would stoop so low. But it happens all the time.

If you can, it’s best to visit frequently and shred any mail that has personal information on it. If your mom has credit card accounts, you can view account activity online with her. You can even opt out of paper statements altogether. That way, you won’t have credit card account numbers within easy reach of whomever is in the room. Credit card fraud could still occur, of course, but by checking accounts online several times a week, you’ll notice if something fishy pops up on her statement.

Even if you can’t visit often, you can still check her credit card accounts online every week from your own home. But ask for her permission to make sure she doesn’t feel like you’re invading her privacy.

Keep an eye on other family members: I hate to say this, but often it’s family members who rob their own parents or grandparents. If you have a family member with issues, such as drug addiction or gambling debt, then that’s a red flag and warrants keeping an eye on things. When someone is desperate for money, they can justify taking it from anyone. They’re counting on the fact that no one will notice. You can prove them wrong by keeping on top of credit card account activity.

Look at the mail. You can learn a lot from the mail. Is your loved one getting letters from “charities” asking for a donation via her credit card? If she’s getting letters from organizations, she may have sent money to them previously. As suggested earlier, looking at credit card accounts online is a good way to make sure she isn’t authorizing payments to fraudulent entities.

Pay attention to new friends: The National Committee for the Prevention of Elder Abuse recommends keeping track of any new “best friends.” It may all be very innocent, but if it’s sudden and there’s an age difference, this may be a red flag that someone is planning to commit fraud.

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Image: Alex E. Proimos, via Flickr

These days, many consumers are likely finding it easier to obtain many types of credit, as lenders have significantly slackened requirements for most loans and credit cards. However, the qualifications to obtain a good mortgage rate remain stubbornly high across the country.

Even as credit conditions improve significantly nationwide and many financial institutions are once again broadening lending efforts, many are still being extremely tight with financing for mortgages, according to a report from the New York Times. In fact, even as subprime lending for credit cards opens up considerably, many consumers with low credit scores will find themselves extremely unlikely to even be considered for a home loan approval.

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A recent study by the Federal Reserve Board indicated that consumers with a credit score of 620 willing to make a 10 percent down payment are now less likely to be approved for a mortgage than they were in 2006, the report said. Further, some were even reticent to extend financing to borrowers making a similar down payment when their credit rating was 720.

This is because most lenders are still extremely gun-shy about lending large sums of money to anyone but the most qualified borrowers, the report said. In many cases, those who are approved for a home loan will also pay far higher rates on the mortgage than those who have top-notch credit scores, even as the average interest rate has hovered below 4 percent for some time now.

“If you don’t have good credit, you’re not going to get that crazy low rate,” Deborah MacKenzie, the director of counseling at the Stamford, Conn., nonprofit the Housing Development Fund, told the newspaper.

[Free Resource: Check your credit score and report card for free with Credit.com]

Typically, the only way consumers can improve their credit ratings so that they can qualify for a home loan is by being smarter about managing their various lines of credit, including keeping credit card balances low and making all payments on time and in full. These are the two biggest factors comprised in a credit score. However, consumers can also be hurt by applying for too many new lines of credit within a short period of time, so avoiding this ahead of shopping around for a mortgage can be crucial to maintaining good credit health as well.

Image: lydiashiningbrightly, via Flickr

Student loan debt has been in the news a lot lately as federal lawmakers grapple with the possibility of extending the current lower interest rates on government-issued education financing, which are set to double this summer. However, many students may have limited knowledge of what they owe on these accounts.

A new study from Iowa State University found that about 40 percent of that school’s student body underestimated how much they owed on their education loans, according to a report from the Des Moines Register. About 10 percent of those surveyed underestimated their outstanding balance by more than $10,000, and just 22 percent carried no student loans at all.

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The researchers say that this study also highlights the pressing need for financial aid offices to step up counseling efforts so kids can better understand the effect these loans might have on their finances for years to come, the report said. The student loan process can often be difficult to navigate and understand for those who have little and, more often, no previous experience in dealing with credit in their own names. Many studies have also shown that college kids tend to lack a general understanding of how finances work, and some have advocated the need for mandates on financial literacy education.

“You’re talking about people who, for them, borrowing is new,” Cynthia Needles Fletcher, a professor of human development and family studies at ISU, told the newspaper. “Yet these are really critical decisions.”

As a means of helping to counteract this lack of basic knowledge about their various outstanding student loans, the school is launching a program designed to increase awareness, the report said. This summer, it will send emails to all its students revealing exactly how much they owe, how much they can expect to pay per month when they graduate, and even a list of all the lenders to which they owe money.

[Student Loans: Research and compare options for student loans at Credit.com]

Recent studies have shown that the average college student now graduates from school with more than $25,000 in outstanding student loans, and that the cost of a year’s tuition has expanded rapidly in the last decade. This, therefore, can be extremely problematic for recent graduates, many of whom may still struggle to find employment within a few months of getting their diplomas.

Image: Sterling College, via Flickr

This week the experts from Credit.com contributed to a wide range of publications on subjects including identity theft, credit scores, credit cards and debt. Check out some of the highlights…

Adam Levin on Identity Theft

Credit.com co-founder and chairman Adam Levin spoke to WABC’s Stacy Sager about what people can do to protect themselves if their credit card numbers have been stolen. Sager reported on hundreds of card numbers, along with names and addresses published to a public website. “The website was stumbled upon by Sean Herskovitz, who never expected to find what he did when he Googled his girlfriend’s name,” Sager reported. “He was shocked to find her credit card information for sale, along with her Social Security number and address.” She spoke to Adam in Times Square, downstairs from Credit.com’s New York office. “The information could be just sitting out there for over a year,” he said, “for people to grab and use.”  @staceysager7 @Adam_K_Levin @eyewitnessabc7

Gerri Detweiler on Family Debt
Credit.com’s Director of Consumer Education Gerri Detweiler spoke to USA Today’s Christine Dugas about a University of Michigan study which reveals that families have more unsecured debt than savings. Unemployment and a tight economy have forced many to drain savings, run up their credit cards, or both. “They still have debt to deal with before they can take care of things like saving more money or paying for their kids’ college education,” Gerri told USA Today. @christinedugas @USATODAY @Gerridetweiler

Beverly Harzog on Credit Cards for College Grads
Credit.com’s credit card expert Beverly Harzog spoke with CBS Philly’s Jim Donovan about the pitfalls that face recent college graduates when it comes to credit card debt. ”When it comes to credit, the most important thing when you’re starting out is, yes it’s fine to get a credit card because it is important to build a good credit history, but pay that balance off every month. You really have to do that,” Beverly said in the report. @jimdonovancbs3 @CBSPhilly

Gerri Detweiler on Credit Scores
Gerri contributed to a couple of stories on PBS’s newish site for boomers, NextAvenue.org. Here’s an excerpt from “4 Lessons to Improve Your Credit Score,” by Caroline Mayer:

Make sure all your medical bills have been paid, either by you or your health insurer (or both of you). ”It’s very easy for a payment to fall through the cracks and end up in collections,” says Detweiler. A 2003 Federal Reserve study found that more than half of all collection accounts noted on credit reports involve unpaid medical bills. “This is a huge problem,” Detweiler says.

She’s also in a NextAvenue piece by Richard Eisenberg titled “It’s Time to Make Credit Scores Truly Free.“ @NextAvenue @richeis315