No credit history but you pay your bills? No problem!

Despite the media largely covering those people who borrowed more than they could afford, there's another sub-set of people who have paid off mortgages and shun credit cards. Consequently, when they or others lacking a standard credit record apply for credit -- a huge group estimated at 70 million adults and also including immigrants, new college grads and the newly divorced or widowed -- they're often turned down because lenders can't estimate the risk.

Fortunately, 'alternative credit bureaus' such as Lexis Nexis and TransUnion, First American Credco and others are jumping to serve this market of the so-called "unbanked." From a story in Business Week:

Financial firms like PRBC, credit report processor First American Credco, data provider LexisNexis, and credit bureau TransUnion are scrambling to fill that void with new products and services that cater to this emerging niche, the so-called unbanked. Traditional credit bureaus usually collect data on credit cards, auto loans, and other types of consumer debt. By comparison, these alternative players gather payment information that isn't reported to the typical data collectors, including cell-phone bills and rent. Increasingly, banks are using that sort of information to help vet potential borrowers...

Collecting and verifying all that data is no easy task. Consumers often stuff rent receipts and electricity bills in an old shoe box or a filing cabinet—if they keep them at all. At PRBC, founded by Chairman Michael Nathans more than a decade ago, home buyers enter their payment histories on the Web site, providing the firm with bank-account data and faxing supporting documents or receipts. Then PRBC, which charges customers a $65 fee, hires an outside firm to do a background check and ensure that the information is legitimate. Rival LexisNexis, which is paid by lenders, pores through public documents to find phone records, auto deeds, and other pieces of a consumer's financial life.

Each company slices and dices the data differently. Some, like PRBC, LexisNexis, and eBureau dump the information into their own mathematical models to come up with a score, not unlike Fair Isaac's FICO, the traditional three-digit scoring system that rates customers on their credit-card and other debt histories. The goal is the same: to help lenders assess whether a customer will make good on a loan...

But while more banks are using the data provided by these alternative credit bureaus in their underwriting process, big lenders remain hesitant to adopt the new credit scores...

Some lenders take their cues from mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). While both use FICO scores in their underwriting, the government-sponsored firms won't use the alternative credit scores until there's more historical data on how well they predict whether consumers will make their loan payments. Critics argue there isn't a large enough sample size in some studies to know whether the data are statistically significant.

But as companies collect more data and mine the information for behavioral patterns, industry experts believe alternative scores will gain wider acceptance. LexisNexis has found that borrowers who stay at the same address for years pay back their loans more frequently than folks who move around. Another study from policy group PERC that looked at 7.5 million people showed that consumers who make timely utility payments tend to be low-risk borrowers.