Alternative sources of creditHere are several other items that can be used for non-traditional credit verification, according to Ross:
- Utility bills for gas, electricity or water as long as they are paid separately from your monthly rent
- Phone and cable bills
- Car insurance, renter's insurance, life insurance payments or medical insurance payments if they are not paid by payroll deduction
- Child care or school tuition payments
"You need at least 12 months and sometimes as many as 24 months of payments to prove your creditworthiness," says Ross. "A bigger down payment offsets your credit risk and so does your job stability, your cash reserves and a high income in relation to your debts."
Credit history mattersThe reason for your lack of credit history will also impact your ability to qualify for a loan. "If you're living with your parents and have yet to establish any credit, it's pretty much impossible to get a loan unless your parents are willing to co-sign for you," says Madison. "The parents will need a credit score at a minimum of 660 and you'll need to have at least two months or maybe as much as six months of principal, interest, taxes and insurance payments in cash reserves in the bank." Borrowers who are new to the U.S. may have a credit report from another country. Ross says those credit reports can be used to create a record of bill payments for a loan application.
You may not know your true credit scoreEven consumers who have a long enough credit history to produce a score still need alternative sources of credit when applying for a loan. The Consumer Financial Protection Bureau (CFPB) recently released a study that showed there are discrepancies between the credit score given to a consumer and one reported to a lender. "This study highlights the complexities consumers face in the credit scoring market," said CFPB Director Richard Cordray in a press release. "When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision." The problem, says Madison, is that borrowers are set up for false expectations. "They may either be expecting to qualify for a better rate than they do, or they may lose out on opportunities for which they don't believe they will qualify, when, in reality, they can," says Madison. This is why having alternative sources of credit -- that can help prove your ability to repay a loan -- is important.
Establishing creditRoss says it takes just six months of credit card usage to generate a credit score, but lenders would also need other sources of credit in addition to your six-month-old score.
"Using alternative credit doesn't change someone's credit score, so if your score is low, all you can do is let time pass while you do the right thing over and over again," says Madison.It's especially important that prospective buyers with thin credit consult with a mortgage lender, says Ross. They can provide you with "a road map to follow to improve your chances of qualifying for a mortgage."