How Consumers With No or Low Credit Can Successfully Navigate the Credit Decisioning Process

Companies that want to remain competitive know it’s vital to find ways to expand their operations. One of those competitive advantages is to offer customers lines of credit and, these days, it’s a regular practice.

However, extending credit to customers does not come without risks for businesses. Accepting payment at a later date means a business has less money on hand to finance its own operations until they are repaid. What's more, if the customer does not have the funds or files bankruptcy, the loaner has few options to recover its money.

For many businesses, cash is king but credit has become increasingly important to them. This is because the benefits of approving customers to take out lines of credit far outweigh the risks. Essentially, businesses want to extend credit to broaden their opportunities to make money. As a result, companies look very carefully at an individual’s credit score to determine their creditworthiness before they’ll offer a “pay later” option to them.

Why do businesses consider extending credit?

It would be ideal to collect cash for every transaction, but in our digital age, it’s not always possible. Extending credit offers customers flexibility and, during a pandemic, this has become invaluable as people actively try to limit personal contact.

Aside from offering consumers more flexibility, over time, companies have learned customers frequently buy more than they need or are usually willing to spend money they wouldn’t when they purchase on credit. This means credit offers businesses a good opportunity for higher profitability. However, since companies have to also be able to make their own payments owed to other creditors on time, they are cautious about who they will approve credit for.

When businesses extend credit and aren’t repaid by credit customers, it has a direct impact on the company’s revenues, profits, production, and procurement processes. If they can’t profit or pay for the goods they need to produce or purchase to sell, they won’t be able to survive. These are all considerations businesses take into account before they’ll approve credit for customers.

How do businesses assess an applicant's creditworthiness?

Many businesses will decide to extend credit to an individual when they determine there is a reasonable expectation the customer can pay back any money they have borrowed in accordance with established credit terms. Thus, consumers looking to receive these credit privileges from a business can expect to be evaluated by the company before receiving a credit decision. The evaluation process typically starts by the business looking at a consumer’s credit score. This number is used to help them determine whether or not an applicant qualifies as a good candidate for a loan. The following criteria are all fed into a traditional scoring model.

  • Consumer’s payment history
  • The average age of the consumer’s existing credit accounts
  • Level of credit utilization
  • Number of recent credit inquiries
  • Composition of the consumer’s credit accounts

Unfortunately, many businesses generally turn to the three major credit scoring companies (Experian, Equifax, and TransUnion) to help them to reach a credit decision. However, these reports rely on a traditional credit history model, so they only provide enough details on a portion of the population – meaning those Americans who have a credit score.

This poses a significant problem. Approximately 14.1 million U.S. adults are underbanked, with many of these Americans not having access to a bank account. Furthermore, statistics suggest that almost 1 in 5 people in the U.S.  don’t have a traditional credit score, while millions of other people have limited or “thin” credit histories. In the case of people with thin credit, the data found by traditional credit scoring systems are often too old or not detailed enough to help businesses make an informed lending decision. Unfortunately, these two categories are dominated by consumers in specific populations: Hispanics, African-Americans, immigrants, widows, divorcees, and young people starting out on their own.

This leaves a large percentage of American consumers without any record of credit, despite the fact that they might be highly creditworthy and completely willing and able to pay back the money they borrow.

Benefits of alternative credit scores

The good news is these consumers can pursue an option called an alternative credit score. If you can show a company you are willing and wanting to pay back the money you borrow from them, you can get yourself approved. However, if you fall into the category of being unbanked or underbanked, pursuing an alternative credit score can help you to establish a positive credit history.

Fortunately, many companies extending credit to consumers are increasingly turning to alternative credit scores as a part of their decisioning process. PRBC’s alternative credit solution is free to consumers and enables businesses to make smart loan decisions for all of their applicants, not just a percentage of them. It also ensures all consumers applying for credit are judged fairly under both the Fair Credit Reporting Act and the Equal Credit Opportunity Act

How PRBC can help you to establish your creditworthiness

An alternative credit solution can help you demonstrate to businesses and other lenders your ability and willingness to pay your debts. All you need to do is pay your routine expenses, such as utility, phone, and internet bills on time. Over time, you will develop a history of trustworthiness, prove you have moral character and show you are completely willing and capable to pay your debts back on time.

PRBC is committed to helping consumers gain a viable credit score. Whether you have no credit, thin credit, or a low traditional credit score, we can help you to improve your credit reputation. Our alternative scoring method will help establish your creditworthiness. To learn more about our services, contact us today.

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