eCredable: Credit Scores for Debt-Free Consumers

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One of the biggest complaints that many consumers have about the credit reporting industry is that you have to use debt in order to build your credit rating. While you can use a credit card to build your credit, and pay it off without carrying a balance, there are plenty of consumers wary of credit cards and using them at all.

For those who have decided to live completely debt-free, opting out of the credit rating system might make sense. However, not everyone wants to make that choice, particularly if buying a home is on the horizon. Even the consumer most adamant about the evils of debt might make an exception when it comes to that. (See also: Quiz: Am I Really Ready to Buy a Home?)

The truth is, if you want to qualify for a mortgage, you must build your credit history and have a good credit score. A new company, eCredable, is working to change how consumer credit scores are measured. eCredable focuses on helping those without extensive credit histories — but who have good financial habits — to find lenders willing to accept alternative measures of creditworthiness.

I recently spoke with Steve Ely, the CEO of eCredable, about what eCredable does and its plans for the future. Ely spent seven years with Equifax, and spent five of those involved with the consumer end of credit products. He hopes that his insights on consumer credit can help eCredable provide something that has been missing from the credit scoring industry.

How Does eCredable Rate Credit Worthiness?

“Many consumers aren’t scorable under more traditional models because they have chosen not to use credit,” Ely told me. “You might look like a credit risk when you are not, just because you don’t have a credit history. eCredable uses your regular payments with landlords, insurers, and utilities to establish that you are an acceptable risk.”

Right now, eCredable is only working with two lenders: an auto lender and a mortgage lender, Churchill Mortgage, endorsed by Dave Ramsey. Ely hopes that eCredable will have 15 lenders willing to work with the company by the end of 2013.

“The auto lender won’t even look at your FICO score,” Ely said. “If you are young, have a good job, and have established two years of a good payment history through eCredable, you can get a loan.”

He told me that it is a little more exacting to get the mortgage loan. The lender will look at your FICO score, and if your credit history shows that you haven’t really had much credit, rather than actually having poor credit, the mortgage company will look at your eCredable report to see your prior payment history.

“The important thing is that Churchill uses alternative credit to underwrite some of its mortgages. Not a lot of companies are willing to do that,” Ely said.

How to Establish Credit With eCredable

In order to establish your prior payment history, eCredable does the legwork of verifying how you have paid your bills over the course of the last 18 to 24 months.

“You don’t actually have to be a member of eCredable for two years to see that length of payment history,” Ely explained. “We confirm your payment history with the accounts you give us.”

The eCredable system grades your credit using a letter system — A is the best credit, and F is the worst. eCredable divides up your payments into three tiers:

• Tier 1: These have the highest weight in eCredable’s model. These are regular payments that might be significant, like rent and utilities.
   
• Tier 2: On this level, you see insurance premium payments and cell phone payments.
   
• Tier 3: The payments that receive the lowest weight in eCredable’s model are those that are usually relatively small and insignificant, like gym memberships.

Even though the tiers are weighted differently, eCredable’s model places highest emphasis on the time you have paid as agreed. Your payment history is most important.

“After looking at your payment history, we consider the tier that the payment is in,” Ely said. “Finally, we look at the size of the bill. Your ability to pay the rent on time each month for two years is more impressive than paying your gym membership.”

In order to establish your rating through eCredable, you are required to submit the accounts that you want used to prove your creditworthiness. Ely said that the typical customer should include rental payments and three other trade lines.

Signup Is Free, but Verification Isn’t

Here comes the bad news. Even though you can join eCredable for free, it’s not free to have the company verify your payment history. This can’t be done automatically; someone has to contact representatives of the accounts in question and manually verify the information related to your payment history.

“It can be a little pricey to establish your creditworthiness in this alternative way,” Ely admitted. “We charge $30 to verify a rental account, and $20 each for the other trade lines. You’re going to pay $90 on average to get set up.”

However, Ely thinks the trade off can be worth it — especially if it means you can get approved for an auto or home loan when you otherwise wouldn’t because of your lack of a traditional credit history.

But he warned that each credit report offered only had a short shelf life. “We don’t continuously update, so if you want to apply for something else in another couple of months, you will need to go through the process again.”

Consumers Can Use eCredable to Track Creditworthiness — for Free

Ely suggested that consumers use eCredable’s free tools to keep tabs on their creditworthiness in general, rather than ordering full-on reports. “We have some great tools that allow you to see where you stand by entering the information yourself. Our tools are free to use, and you can use them to track your progress.”

Build a profile in eCredable, and you can receive alerts when your situation changes, watching your progress. “Before ordering a report, consumers should use our tools that allow them to put in their information. The tools will tell them their credit grade. They can then make plans to improve,” Ely said. “We also offer a tool that is a cross between a budgeting tool and a rate watch. It’s about learning good financial behaviors.”

As your credit improves, you receive email alerts. Then, once your alternative credit rating through eCredable has improved to the point where you are likely to be approved, you can order your report. “It’s not meant to be a way for you to check up on your standing,” Ely emphasized. “We have free tools you can use to track your progress.”

Ely said that eCredable isn’t trying to replace FICO. “We just want to provide a way for those who are creditworthy, but don’t look it through traditional scoring, to have access to affordable financing.”