Millions of Americans are”credit invisible.” They do not have sufficient information in their credit reports to have a credit score. But with a few straightforward steps, it’s possible to fix this.
Another 19 million are “unscored,” meaning that their credit records can’t produce a score based on widely used credit scoring models because they lack a sufficient amount of credit history or their documents include too much “rancid,” or out-of-date, data.
Falling into one of these categories may have a profound effect on consumers’ lives. Credit reports track an individual’s credit history, together with information about such variables as bank, car and student loans, mortgages and payment history. Credit scorers, such as FICO, use that data to ascertain how reliable a risk a consumer is and sum it up in a three-digit score, ranging from 300 to 850. That number affects your ability to get a mortgage, credit card, automobile — sometimes even a job — and the interest rate you’re charged on loans.
The problem is even worse for those groups which, according to the CFPB, are particularly more likely to be credit invisible or unscored. For instance, about 15 percent of African-American and Hispanic consumers are credit invisibles, compared to 9 percent of whites, according to the CFPB. And close to 30 percent of consumers in low-income neighborhoods are credit imperceptible and 15 percent are unscored versus 4% imperceptible and 5% unscored in upper-income places.
How to make a credit profile
There are easy ways to establish a credit history. “But everybody has to start somewhere.”
Here are some options to begin:
1. Apply for a secured credit card.
You do not need a credit rating to apply for one of those babies, and they can help you establish a credit history. A secured card requires you to put down a refundable deposit of, say, $300 to $50, which functions as your credit line. Basically, you’re borrowing from your own money, and if you default on payments, the lender will tap your deposit for repayment. But if you use the card wisely by charging small items and repaying the accounts in full by the due date, you will begin building a positive credit history.
Do not assume that all secured cards report your account activity to the credit bureaus; call and ask before you apply. Capital One’s Secured Mastercard, for instance, charges a variable rate of 24.99 percent. So it’s best to shop around to find the best offer and to always pay off the balance each month on time to avoid incurring interest or late payment fees.
And for the record, prepaid cards are another product that typically do not report to the credit bureaus.
2. Get yourself added to an existing credit card account.
Another easy way to create a credit profile is to seek out a loved one or family member with a longstanding, favorable credit history and ask to be added to his or her card as an authorized user, says Tracy Becker, president of North Shore Advisory. The older the individual’s card account, the better, she says, because the data dating back to when the credit card has been opened will be reported on the authorized user’s credit file. One exception, says Becker, is American Express, which only sends information to the credit bureaus in the date the authorized user was added to the accounts. It should take about three weeks for the information to create an impact on your credit history, Becker says.
As an authorized user, a card will be issued in your name, but you don’t have to use it to generate a credit history. In fact, it’s better to just keep the card in a drawer and not use it in order to avoid any conflict with the main cardholder, who’s ultimately responsible for all charges on the card. After all, this person is doing you a big favor just by giving you their credit history.
After a few months, check your credit rating (a fantastic place to get a free FICO score is at Discover Scorecard). Once your credit score reaches a comfortable stage, say 670 to 740, then it is time to apply for a card of your own. Once accepted, only then should you request to be removed as an authorized user because you’ll need that borrowed credit history to qualify for the new card.
3. Join a credit union or community bank.
Credit unions are more user-friendly than the big banks. Because credit unions usually report to the credit reporting bureaus, you can use that loan to construct a credit history.
With credit-builder loans, the financial institution places your “loan” money in an interest-bearing savings account. As you make payments, that action is reported to the credit reporting agencies. Once you have”reimbursed” the loan, it is only then that you get the money. This way, there isn’t any risk to the bank.
Another alternative: passbook or certificate of deposit loans, in which your bank permits you to use your savings or CD account as collateral for a loan. Sometimes, you can borrow 100 percent of the amount on your account; in others, you can just be allowed to”borrow” 85 to 90 percent of the amount you’ve saved. You pay an origination fee and interest, which is generally higher than what you get on the account. During the loan period, you won’t have access to the cash in the accounts before the end of the loan, but you continue to get interest on it.
4. Apply for short-term, high-interest cards or cards.
You may be able to secure a loan for a car and begin establishing a credit history. But odds are, however, the loan interest rate may be too high. In the event that you can pay off the loan in a short period of time, it could be worth the expense.
However, you may qualify for a gas credit card or a retail card, as these cards tend to come with smaller credit lines and higher APRs. To avoid paying interest charges, all you have to do is pay off the entire balance by the due date every month.
Still, watch out for predatory lenders.
5. Pay your bills on time.
This one is a biggie. Even if the bills you’re paying don’t report to the credit bureaus, missing payments will hurt your chances of building credit. Debts that wind up in sets end up being reported to the credit bureaus. Some companies may even send you to collections.
Ultimately, with several simple moves, conscientious bill payment and patience you should have the ability to build a solid credit history.