Clarity Services uses alternative data to help consumers with thin or nonexistent credit profiles improve their credit. Here’s how it works and how you can take advantage of it.
If you’re ready to open your first credit card or get a loan, one of the most important things a lender will check is your credit score. When you have a thin credit file or no credit at all, that can be a real roadblock to borrowing.
Experian Clarity Services eases the path to alternative financing access for people may have limited experience using credit. If you’re wondering how it works or how it might benefit your credit situation, this guide breaks down everything you need to know.
See related: Best credit cards for people with no credit
A 5-step guide to Clarity Services by Experian
What is Experian Clarity Services?
Clarity Services is an alternative credit reporting service that’s designed to help people with limited credit history. It’s the largest Fair Credit Reporting Act-regulated credit bureau to focus on the subprime segment.
“Clarity focuses on data reporting for underbanked, near-prime and subprime consumers because they have minimal recorded data and assessing their creditworthiness proves to be a challenge for lending institutions,” says Alpa Lally, vice president, data business, at Experian Consumer Information Services.
The use of nontraditional data for credit reporting is a relatively new idea that’s steadily moving into the mainstream.
“We’re seeing increased awareness in the value of alternative data among credit reporting agencies, lenders, credit building services and consumers,” says Sanjoy Malik, CEO of data aggregator Urjanet. “This alternative data has shown to be an effective method to build or restore a good credit history.”
That’s important for people who may want to pursue traditional borrowing options but have found the door closed to them. The goal of Clarity Services is to help lenders better understand who these consumers are and offer appropriate financing solutions, says Lally.
See related: Fair Credit Reporting Act: A guide to your rights
How does Clarity Services work to create credit reports?
Traditional credit reporting revolves around consumer debts, such as credit cards, student loans or car loans. Clarity Services offers real-time credit reporting based on that information if it’s available, but it also expands its scope to include a variety of other financial accounts.
Some of the alternative data services Clarity derives information from include:
- Auto loan financiers
- Check cashing services
- Prepaid card issuers
- Short-term installment lenders
- Peer-to-peer lenders
- Small dollar credit lenders
- Cellphone providers
“Similar to how information is collected for Experian’s core credit bureau information, financial institutions report payment information and inquiries on loans to Clarity,” says Lally.
Lenders can then use the information in a consumer’s Clarity credit report to make approval decisions when someone applies for a loan or line of credit. It greatly streamlines the credit reporting process for those with scant credit history.
“In the past, rent, utility and telecom payment history were difficult to incorporate and relied heavily on manual, paper-based processes,” says Malik. “With the advent of new technologies, there are no more automated, tech-driven solutions that provide consumer-permissioned access to this information directly from landlords, utilities and cellphone communication providers.”
Clarity is not just for lenders, however. Consumers also have access to their credit files and scores through ClarityServices.com. There’s no charge to request your Clarity credit report or score and you don’t have to sign up for any ongoing services.
How does Clarity Services benefit consumers?
In a nutshell, Clarity Services is designed to help those who’ve been shut out of using credit expand their financial horizons.
“Alternative credit scoring helps lower-income and unbanked consumers by empowering them economically, expanding their access to loans and credit,” says Oleg Yavorovskiy, founder and CEO of Guardian Debt Relief.
Younger people who are just beginning to manage their finances and people who come to the U.S. from abroad and have no credit data can also benefit. Alternative credit reporting can make it easier for those individuals to rent an apartment or open utility and cellphone accounts, says Yavorovskiy.
A positive cycle of credit-building is established when consumers get credit for paying rent and utilities on time, says Malik. “When alternative data is used for credit scoring, it helps to dismantle the credit Catch-22, where millions of consumers are currently trapped and cannot receive credit because they lack a credit history.”
That can help bridge the gap to more traditional credit reporting and borrowing opportunities. Lally says Experian estimates that more than 40 million “credit invisibles” may be able to access mainstream credit products by incorporating alternative data from Clarity into new credit scoring models, such as Experian Lift.
Are there downsides to Clarity Services to be aware of?
The most obvious drawback is that your Clarity Services credit report and score aren’t traditional FICO or VantageScores, which are more widely used by lenders.
Say you’re applying for a credit card or a car loan, for example. If the card issuer or lender only checks FICO scores or traditional credit reports, you may still have trouble qualifying for credit.
If you’re working with a lender that uses Clarity to verify credit history, your approval odds may increase. But you still have to consider the financing terms you may qualify for if you have poor or thin credit.
Low or nonexistent credit scores may result in paying higher interest rates or fees to borrow. It’s important to weigh those costs carefully so you know exactly what you’re getting with alternative financing.
Yavorovskiy says that from a general perspective, it’s also important for consumers to be aware of what alternative data sources they have that could be tapped for credit reporting.
“One major con is that alternative data often utilizes personal data, such as social media or mobile phone data, which is believed to have predictive qualities on creditworthiness,” he says.
How can you make the most of Clarity Services?
There’s nothing you need to do to enroll in Clarity Services; data is collected on your behalf automatically. With that in mind, Lally says consumers should be aware of exactly what they can do with Clarity Services. That includes:
- Checking your Clarity credit report and score at no cost.
- Placing or lifting a security freeze on your Clarity credit report.
- Requesting a 1-year, 7-year or active duty fraud alert for your report.
You can also sign up to opt out of any prescreened credit offers that may be connected to data in your Clarity credit report.
Checking your Clarity report and score monthly or quarterly is a helpful way to see how much progress you’re making in building credit. In the meantime, you can work on developing habits that can put you on the radars of traditional credit scoring models.
“For both traditional and alternative data, paying bills on time will always improve your position,” says Yavorovskiy. “Try to never miss any payments because even one missed payment can have a detrimental effect on credit.”
Beyond payment history, familiarize yourself with the other factors that go into traditional credit scoring.
If you have a secured credit card, for example, try to maintain a low balance to credit limit ratio, since that factor is the second-most important after payment history. Keep any older credit or loan accounts you may have open and avoid applying for new credit too often.
“Focus on building and improving these factors over time for maximum results,” says Yavorovskiy.