How can you build credit when you have no credit? We’ve received this questions from several readers recently. Some want to know how to build credit without a credit card, or how to build credit without getting a loan. Until recently, the answer to these questions was simple—you can’t. The three major credit reporting agencies (Trans Union, Experian, and Equifax) all collect information on repayment of credit cards, car loans, mortgages, and other forms of debt. If you’ve never borrowed money, you don’t’ have a credit score or history. Here’s why.
The big three credit bureaus track your payment history on money you’ve borrowed. Using the FICO credit scoring model, they then take the data they’ve collected and generate a FICO score. When lenders want to evaluate a potential borrower, they pull the credit report from one or more of the big three, along with the related FICO score. The problem is that for many with no credit or limited credit, they are often turned down for credit cards and other loans even if they pay all of their bills (e.g., rent, insurance, utilities, cell phone) on time.
The need to borrow money to build credit, however, is starting to change. Thanks to Payment Reporting Builds Credit (also called Pay Rent, Build Credit, Inc.) and what’s called the FICO Expansion Score, you can build credit without borrowing money. It’s not a perfect solution, as we’ll discuss in a moment, but it can help many people establish credit, including those who take advantage of no fee prepaid credit cards. We’ll take a quick look at how they address this issue, followed by how you can establish a credit file with PRBC and a FICO Expansion Score.
Fact: According to FICO, an estimated 25% of the US adult population (about 50 million individuals) lack enough traditional credit data to generate a FICO score.
Payment Reporting Builds Credit
PRBC was established in 2002 to provide credit reports for those who have limited or no credit. Here’s how PRBC describes its mission:
Founded in March 2002, PRBC is a consumer reporting agency (commonly known as a credit bureau) that was launched to support risk based credit and insurance pricing, and to end the socio-economic injustice of missing positive payment information from so-called “traditional” credit reports and scores.
PRBC is similar to the big three credit bureaus, but rather than generating a credit score based on loan payments, PRBC uses a consumer’s history of paying rent and other recurring bill payments.
FICO Expansion Score
In 2004, Fair Isaac, the creator of the FICO score, introduced the FICO Expansion Score. Similar to the efforts undertaken by PRBC, the FICO Expansion Score is designed to create a credit score for those with little or no credit. Here is Fair Isaac’s explanation of the Expansion Score:
Introduced in 2004, this innovative score is based on a variety of non- traditional predictive data not found at the reporting agencies. FICO gives lenders the ability to expand their customer base to millions of untapped consumers by creating a “virtual network” of predictive data and applying the advanced analytics that have made FICO the most trusted name in credit scoring.
Like the FICO score, the FICO Expansion Score is based on a range between 300 and 850.
PRBC & FICO Expansion Score Join Forces
In 2007, PRBC and FICO joined forces. PRBC brought its credit reporting data together with FICO’s Expansion Score to create what it calls “a comprehensive credit risk management tool that U.S. mortgage lenders can use when assessing the risk of applicants who have little or no traditional credit history.”
The big question is what lenders actually use the PRBC/FICO Expansion Score to evaluate consumers without a traditional FICO score. It appears that the likes of Ford Motor Credit, Chrysler, and HSBC use these credit scoring models. And according to Fair Isaac (PDF download), a study involving the participation of American Express, Credit Suisse, Chrysler, Ford, HSBC, and others validated the effectiveness of the FICO Expansion Score in predicting credit risk.
So while reporting monthly payments to PRBC will not establish a traditional FICO score, it could represent a good start on your way to building a sound credit history through the FICO Expansion Score.
How to Get Your Payments Tracked by PRBC
If you are looking to build credit without borrowing, the big question is how to have PRBC track your monthly payments. The easiest and least expensive way is through a prepaid credit card. Several prepaid cards have partnered with PRBC and will submit monthly recurring payments made with the prepaid card to PRBC to be included in your credit file. There is typically no fee for this service.
- While not all prepaid cards offer this service, two that do are AccountNow and Vision Prepaid cards.
As we mentioned at the start, PRBC and the FICO Expansion Score are not perfect solutions. There are still creditors out there that won’t extend credit to those without a traditional FICO credit score and report. But it does appear that more and more companies are using PRBC and FICO Expansion Score to extend their products and services to those trying to build their credit.