5 Steps to Embrace Alternative Lending and Build Credit

Originally Posted On: Equities.com

By: Dusty Wunderlich

Anyone who has followed the economy over the past decade has seen the effect lending can have on the world at large. From the careless practices that led to the 2008 economic recession to the shady banking activities of 2016, missteps have abounded in the financial sector.

In recent years, alternative lending companies and platforms — those focused on helping customers rather than the institution’s bottom line — have shifted consumers’ access to borrowing power. It’s not surprising that alternative lenders are gaining more traction as lending tools improve. With more companies embracing alternative forms of lending, more options exist than ever before for customers to start building credit.

The rise of alternative lending practices has happened for one very basic reason: the old model of loan evaluation is broken.

Scott Crawford, vice president of product and marketing at Ascend Consumer Finance, says that “with traditional underwriting, you have huge gaps.” He also cites problems in the traditional data world, where traditional banks commonly use outdated or misleading information. Customers with spotty or nonexistent credit are simply rejected out of hand — with almost no options for recourse.

As we face low levels of entrepreneurship in our economy, some financial institutions have begun to question these outdated practices.

My team at Bristlecone Holdings noticed that monthly payment amounts were more indicative of a borrower’s success than even their credit score. As we considered that, we realized that it’s not only access to credit that’s a key measuring tool for consumers — it’s ensuring their success once they get that credit.

Alternative lenders are finding that they can look at more than just credit scores. Leading indicators, such as public records and transaction data, can show not only how consumers have behaved in the past, but also how they are behaving in the present. This way, even people with little or no credit history can get the opportunity to prove themselves.

As government regulation and an increasingly tech-savvy market have demanded innovation, the market is beginning to shift away from old, flawed practices in favor of more effective lending solutions. For those looking to capitalize on this new financial frontier and improve their fortunes, here are a few steps to get you on the right path:

  1. Know Where You Stand – It’s hard to plan a financial future without knowing where you are today. Plenty of free resources exist to help you see your credit report and determine whether you’ve created enough credit to have a baseline score. AnnualCreditReport.com is a government-sponsored site where you can get your credit report for free without it hurting your score. You can see the accounts you have open, the things adversely affecting your credit, and the positive trends you should keep up to bring it higher.
  2. Get Moving Now – Definitely don’t wait until you need it. Credit has this stigma because some generations were taught to live within their means and not to get something they cannot afford. There’s a happy medium between that thinking and the credit system.
  3. Start with the Basics – If you are credit-invisible or have a thin file, don’t take on more than you are able. Applying for too many lines of credit at one time can damage your score. There’s also a chance that you’ll just get denied, which can adversely affect your credit report. It’s better to apply for things for which you know you will qualify.
  4. Chat with Your Bank – Secure credit cards are a sensible option that a lot of banks offer. In these cases, you put money down in advance for your credit line, and your credit limit is based on the amount already in your account — keeping you from spending more than you have.
  5. Pay Your Bills On Time – It may seem rudimentary, but the entire basis of a high credit score is consistent, reliable payment of outstanding loans. The longer your history of punctual repayment on a single loan, the higher your score will rise. That’s really the fundamental rule.

The evolution of alternative lending gives consumers more choice, better products, and better pricing. With the convergence of technology and non-banking institutions, more efficient platforms can be created in which underserved consumers in the marketplace can finally get the fair shake they deserve.