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smart The Nontraditional Route to a Positive Credit History

For the estimated 35 to 50 million consumers who don't have full credit histories, the use of data such as information about daycare, rent, or even rent-to-own payments, literally is opening doors ... some of them to home ownership.

Whether you qualify for a mortgage depends in large part on your credit score, which is a record of your bill-paying history and a reflection of your creditworthiness. Consumers who don't carry credit cards or take out personal loans typically don't generate a traditional credit score. Now, that's changing.

Some lenders now use nontraditional payments to assess credit risk, giving recent immigrants, low-income consumers, recent widows and divorcees, and young adults opportunities to build wealth--opportunities that don't exist without a credit history.

Nontraditional payments that typically aren't reported to consumer reporting agencies, but that may help lenders assess credit risk, include monthly rent, electric, gas, cable, telephone, wireless, rent-to-own, insurance premiums, or daycare payments.

Fair Isaac Corp. (FICO) has an expanded credit score that uses several nontraditional payments to assess a consumer's credit risk. The FICO Expansion score is one example of an expanded service option for consumers who have missed out on opportunities simply because they lack a traditional credit history.

To improve your credit score:
  • Pay all bills on time. And pay early, if you can, to avoid late payment fees. If you typically pay late, you're considered a higher risk and your score goes down.
  • Avoid bankruptcy, foreclosure, and repossessions. These actions have a negative effect on your credit score and your ability to get credit in the future.
  • Keep a low utilization rate. Keep your credit balances less than 25% to 35% of available credit and never "max out" a credit card.
  • Don't rush to close or open accounts. Close old, unused accounts only if you don't plan to apply for a loan within the next few months. If you open a flurry of new accounts in a short time, the lender may think you're desperate and question whether you can repay your debts.
  • Be cautious about co-signing. If the other person has bad credit or doesn't pay the bill, your credit rating is on the line.
  • Pay your library and parking fines. Believe it or not, those unpaid fines can work against you if they're reported to a credit-reporting agency. The amount of the unpaid balance doesn't matter--what matters is that you haven't paid a bill, and that's what potential lenders view negatively.
  • Finally, review your credit report for accuracy. Get one free credit report annually from each of the three main credit reporting agencies--Experian, Equifax, and TransUnion. Go to for information.

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