Friday, May 19, 2006

Alternative credit scoring systems could solve Credit Catch 22

USA Today had an interesting story earlier this week about the potential for new credt scoring agencies that would take into account payment histories of things such as rent, utilities, etc. in determining a credit score instead of only relying on credit card payments and installment loans (auto, mortgage, etc.) as most do now.

As I've mentioned, the current system often puts consumers in a Catch 22--you can't get credit at decent rates until you have a credit history, but you can't build a credit history unless someone give you credit.

According to the USA Today article, the moves are in part to gain more of the Hispanic market. Also, consumer advocates want to steer more people away from payday lenders and toward banks. Right now, people who can't get credit often go to payday lenders for a short-term loan with sky-high interest rates--get $500 today and pay $550 in two weeks, or a 10% payment for just two weeks, which calculates to over 250% if stretched over a full year as most interest rates are calculated.

It seems there is a long way to go to actually make payments other than credit and installment loans a significant part of the credit score, but at least some companies are now trying to serve that market, which could eventually mean better credit rates for everyone.


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