If you have no credit or insufficient credit to generate a credit score, you could be one of the 45 million adults in America the Consumer Financial Protection Bureau (CFPB) reports as “credit invisible.”
To figure out how to help the credit invisible, the CFPB announced today that it’s “launched an inquiry into ways to expand access to credit.”
Here’s what this mean for consumers looking to establish credit, and how they can overcome the challenges of being credit invisible today.
45 million have no credit or lack credit history
According to the CFPB, 45 million consumers’ financial options are limited by no credit or a thin credit file. What’s more:
- 26 million American adults have no credit history with any of the three major credit agencies
- 19 million have a credit history, but their reports do not include enough data to generate a credit score
But the CFPB is interested in changing that with its new inquiry into alternative credit reporting.
“Alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources,” CFPB Director Richard Cordray said in a statement.
“We want to learn more about whether this non-traditional approach can offer opportunities to millions of Americans who are credit invisible and how to minimize any risks in how this information is used,” Cordray added.
No credit score, no dice
Building credit is essential for consumers, and having good credit is even more important. It can help you rent an apartment, purchase a car or home, and potentially even affect your job opportunities
If you’re a borrower, your credit score is compiled by national credit reporting agencies (NCRAs). The main three in the U.S. are Experian, Equifax, and TransUnion.
These agencies have formulas that analyze your borrowing habits to determine the risk level of lending to you. From there, lenders apply their own formulas based on the type of credit you’re applying for, and so on.
But if you’ve never been a borrower, there’s nothing to analyze. And without a credit score, getting access to certain financial products everyone else takes for granted can be nearly impossible for you.
Who is likely to be credit invisible?
So who are the credit invisible? The CFPB states that they are more likely to be Black or Hispanic, or live in low-income areas. Recent immigrants, young adults just starting out and widows or divorcees who relied on their former spouse’s credit are also more likely to be credit invisible.
What’s more, if low income is a barrier to financial products used to build credit, the issue is worsened by the fact that you can’t build credit without these products.
According to a 2015 CFPB report, “If lower-income consumers have a more difficult time qualifying for traditional credit and, as a result, rely on non-traditional sources like payday or auto-title lenders, then this will exacerbate the differences by income as these non-traditional sources of credit generally do not report information to the NCRAs.“
Consequently, low-income earners may be forced to rely on alternative credit products to borrow. Yet, these products often come at a higher cost and don’t help them establish credit successfully.
What happens if you’re credit invisible?
Being credit invisible isn’t a problem if you’re never going to need credit. But that’s just not a reality for most of us.
And if having low-income is part of the reason you can’t access the financial products that will help you build credit, then it’s unlikely that you’ll have the cash to pay for everything you need.
Even for a high-income earner, buying a home or car in cash can be quite a stretch.
Therefore, low-income earners have to seek out other methods to finance things they need or want. And these other methods don’t come cheap.
How to establish credit for the first time
People with no credit score suffer on two fronts.
- They have a harder time obtaining credit at fair interest rates.
- They have a harder time building credit since they can’t get the products that report payments back to NCRAs.
There is a way to break out of this vicious cycle. However, it will take six months to one year or more to achieve. But the sooner you start, the sooner you’ll master how to establish credit once and for all.
1. Open a bank account
Bank accounts may not get reported to NCRAs, so opening an account won’t directly help you go from no credit score to robust credit history.
However, as mentioned above, opening a bank account will help you establish a relationship with a bank or credit union. And once you do that, you have a better chance of obtaining products from them that will help you build your credit, such as a loan or credit card.
2. Obtain a secured credit card
If you need to get a credit card with no credit, then consider getting a secured credit card.
Secured credit cards require a deposit, the amount of which determines your credit limit. Some allow you to spend more than your deposit, but not all.
Since borrowers have to put money down to get a secured credit card, these cards aren’t the best tool for financial emergencies. However, they are a great tool for establishing credit.
Payments to secured credit cards are reported to NCRAs. So if you obtain one and use it to make small purchases each month, all the while paying it off by your due date, then you’ll start building a credit score.
3. Make all of your payments on time
No matter what type of payments you have, make them on time.
It doesn’t matter if we’re talking about payments for your secured credit card, medical bills, or electricity. All of these can get reported to NCRAs if you’re late or, worse, in default.
Having no credit score is one thing; having a credit history showing accounts in collections is another. And it’s a lot harder to recover from.
Keep in mind that lenders can start reporting late payments to NCRAs in as little as 30 days. So no matter what you do, make it a priority to make all of your payments on time.
And, most importantly, never let an account fall into collections (yes, that includes things as small as library fines). If you’re experiencing financial troubles you know you can’t fix, start talking to your lenders or servicers now to see if you can work out a revised payment plan of some kind.
4. Keep your accounts open
Whether it’s a bank account, a secured credit card, or even a traditional credit card, keeping accounts open can help you establish a credit history.
Essentially, the longer an account is open (with a positive payment history), the better it is for your credit score.
5. Understand your credit score factors
If you want to know how to establish credit, you first need to know how credit scores are calculated.
Everyone who has a credit score has more than one. That’s because there are several types of credit scores, NCRAs, and algorithms that lenders use to determine a score.
- Payments history
- Amounts owed
- Length of credit history
- Credit mix
- New credit
Payments history refers to whether or not you made payments on time. This is the most important factor, which is why you don’t want to fall behind on any payments.
Amounts owed refers to how much you owe on a balance in relation to your current credit limit (otherwise known as your credit utilization). This is also an important component of your score.
Length of credit history is self-explanatory, so just remember that a longer positive history is always better.
Finally, credit mix and new credit are at the bottom of the list. This is not something to worry too much about if you’re a new borrower. These two factors refer to having more than one type of credit and not applying for too much credit, respectively.
6. Use alternative credit building tools
There are also other credit building tools out there that aren’t traditional credit cards or secured cards.
For example, if you’re a renter looking to build credit then you should look into using alternative credit reporting services like RentalKharma. They verify that your rent has been paid, then report it to TransUnion for inclusion on your credit report.
Essentially, Rental Kharma works with your current landlord and reports on time and late rent payments to TransUnion.
You can also look into credit builder loans offered by servicers like Self Lender. These types of loans, also called “savings-secured installment loans” or “CD-secured installment loans,” allow you to create a payment history that’s reported to the credit bureaus.
After a year of payments with a credit builder loan, you can have a well-established credit history to work with.
Beware these products marketed to the credit invisible
It’s an unfortunate catch-22 that those with low incomes are stuck with more expensive borrowing methods. And the reason this happens is because credit scoring is all about risk.
If a lender can’t determine the level or risk in lending to you, they’re going to charge you significantly more interest. This interest is more or less an insurance policy for them. So if you default on your payments, at least they earned a lot from you in interest on the payment you have made.
On the flip side, if you have a high credit score, then lenders will believe that you’re not likely to default.
In that case, they want to compete for your business and will offer you credit at lower interest rates. This is something they feel safe doing because they feel they can assume that you’ll eventually pay them off.
Here a few of the most popular types of products being marketed to credit invisibles.
1. Payday loans
Payday loans are short-term loans that enable you to borrow against a post-dated check. That means you pay back the lender when you get paid your future paycheck.
However, most people already have their next paycheck earmarked for other things. So it can put you in a bind later when you realize you can’t devote your entire next paycheck to the payday loan you just took out.
Therefore, if your current income isn’t enough to pay your bills and you use a payday loan to get by for two weeks, then you’re only going to need more money when two weeks are up.
And if you get another payday loan, you have to pay back more than you borrowed yet again. Ultimately, you could end up in a vicious borrowing cycle.
In fact, a 2014 report by the CFPB found that “80% of payday loans are rolled over or followed by another loan within 14 days,” and that “monthly borrowers are disproportionately likely to stay in debt for 11 months or longer.”
So for a quick fix, some borrowers may find themselves in debt for nearly a year. Even worse, when annualized, the fees on these loans can go up to triple-digits in interest. This blows even the highest of credit card interest rates out of the water.
Short-term loans aren’t just being offered at brick and mortars anymore, either. Now high-interest short-term loans can be found online, making it that much easier to ensnare borrowers who think they have no credit options.
Nearly everyone goes through a time of financial need. But having to turn to these loans can create a much more difficult financial road ahead. Borrowers should do whatever they can to find other options when they’re in need of a loan.
2. Rent-to-own products
Although the idea of rent-to-own sounds great, the costs can be far more than other credit options.
And while there’s a wide range of rent-to-own products you can buy (from a television to a home), these products don’t come cheap. Nor are they always regulated.
According to the Federal Trade Commission (FTC), “most rent-to-own transactions are not regulated by federal lending and leasing laws that set disclosures and certain consumer protections, although some lease-purchase plans could be covered depending on the arrangement.”
What kind of disclosures should you be worried about? Fees. Lots and lots of fees. Things like processing fees, delivery and pick-up fees, installation fees, damage fees, late payment fees, and more.
And even if you can avoid all fees, purchasing through rent-to-own schemes will likely cost you more in the end than other financing options. Here’s an example from the FTC to illustrate the difference in costs:
“A $612 laptop computer may be offered at $38.99 a week for 48 weeks, for a total of $1,872, excluding sales tax and other charges. That’s the same as buying the laptop at the manufacturer’s suggested retail price and financing it at an interest rate over 300%.”
3. Rent-to-own homes
Rent-to-own programs for homes can be just as dangerous, as highlighted in The New York Times during their study of one such company, Vision Property Management:
“An examination by The New York Times of contracts and court filings, as well as interviews with housing lawyers and more than a dozen of Vision’s customers across the country, found that these deals are risky, lack consumer protections and may not be enforceable in some states.”
What’s so risky about these deals? For one, placing borrowers in homes that needed renovations beyond what a budget-strapped borrower can handle:
“Most tenants walk away with nothing, having sunk money for rent and repairs into homes they had once hoped to own. Others faced surprised evictions, having signed a contract that did not disclose what repairs were needed, yet set a deadline for making sure the home was up to a local housing code.”
Our own study on rent-to-own homes showed other issues with these schemes, too.
These included higher than average rental increases, purchase price increases, and no guarantee of financing. So you could end up paying more the whole time you’re renting, only to find out that you can’t get approved to buy anyway.
A borrower hoping to own a home might be better off with traditional renting while saving for a down payment and building credit.
4. Prepaid debit cards
The prepaid debit card isn’t a tool for borrowers, but it is marketed to the credit invisible. This product is sold as a way to build credit and to “bank” without a bank. Yet in both cases, it’s not the best option.
Just like every other product mentioned so far, prepaid debit cards aren’t as regulated as other financial products. But where they really get you is the fees.
As highlighted by Time in 2013, you could end up paying an activation fee, monthly fee, point-of-sale fee, customer service fee, even an inactivity fee. You won’t necessarily get hit by all of these, though, as the fees vary per card.
Here’s the thing: if a borrower is seeking a prepaid card to avoid paying a monthly fee for a bank account, they’re probably going to pay that price and then some for a prepaid debit card.
On top of that, a fee paid for a bank account opens the door to a relationship with that bank account. That’s an opportunity you’d miss if you choose to go with a prepaid debit card instead.
If someone is struggling to build credit, then building a relationship with a bank or credit union is a great first step. Opening an account and keeping it in the positive can help consumers obtain credit from their bank later.
Remember, it’s all about risk. If a bank has already seen that you’ve shown positive history with them on the deposit side, they might be more willing to lend to you on the credit side.
You can become credit visible
So what’s there to do if you’re credit invisible or unscorable?
Take steps to establish your credit now. Avoid predatory lending (like the products mentioned above) as much as you’re feasibly able to. And keep on working to build your credit history.
Whether you’re building credit for the first time or trying to repair less than perfect credit, it’s a process. But it’s one you can succeed at if you’re determined to do so. So don’t give up hope – follow these steps and you can become credit visible in no time.
Elyssa Kirkham contributed to the reporting of this article.
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|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
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* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
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|7.73% – 29.99%||$1,000 - $50,000|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
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|15.49% – 34.49%5||$2,000 - $25,000|
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