Are you a "credit invisible?" The Consumer Financial Protection Bureau defines credit invisibles as those adults whose credit histories are so limited that they don't have three-digit credit scores. According to the bureau, 26 million U.S. adults have no credit histories with national reporting agencies TransUnion, Experian, and Equifax and, because of this, no FICO credit score.
That's a huge problem. Lenders today rely heavily on three-digit credit scores to determine which consumers are good lending risks. They also use these scores to determine the interest rates they charge on auto and mortgage loans. Consumers without credit scores, then, will struggle to qualify for credit cards, home loans, auto loans, and personal loans. And even if they do qualify for credit, they'll pay far higher interest rates.
Why Credit Matters
Having a high credit score can even have an impact on what job you land and where you live. A growing number of employers are analyzing the credit of job applicants. And many apartment landlords do the same before deciding whether to rent to prospective tenants.
"Not having a credit score absolutely impacts your qualify of life," said Steve Joung, founder and chief executive officer of Chicago-based apartment rental agency Pangea Properties. "If you have better credit, you can rent a nicer apartment. You can get in a neighborhood that is closer to transportation and to your job. Your apartment building might have more amenities that bring you happiness. The quality, condition, and location of where you live is a big factor in your overall happiness and satisfaction."
Consumers build credit histories by paying bills such as mortgage, auto, or student loan payments on time. They also build a credit history by making regular credit card payments. Those consumers who don't have student loans, auto loans, home loans, or credit cards? They might not generate any credit history.
Many consumers are surprised to learn that several payments they make are not reported to the credit bureaus. Payments to medical providers, utilities, and cell-phone companies are not reported, and don't help consumers build a credit history. Up until recently, none of the three credit bureaus tracked on-time rent payments, either. That is starting to change, with Experian and TransUnion now giving landlords and renters the chance to report their monthly payments.
Consumers who don't have enough credit history won't have credit reports that are full enough to generate a three-digit credit score. They will struggle to qualify for any loan or credit program.
How to Build Credit
There is hope, though. Rod Griffin, director of public education with Experian, says that consumers can start building their credit in small ways. One such way is to apply for a secured credit card at their bank or credit union. (See our favorite secured credit cards)
A secured card operates like a traditional credit card except for one big difference: The credit limit is tied to the amount of money the card's holder has in a savings account. But card holders can't spend more than their limit.
Secured accounts are a way for financial institutions to offer credit to consumers who lack a credit history while also protecting themselves: Consumers can't charge more than they can afford. These credit cards are limited. But those who make their payments on time each month will steadily begin to build a credit history.
Consumers can also ask a family member who has a high credit score to co-sign for them on an auto or personal loan. This gives consumers without credit histories the chance to show that they can make loan payments on time.
Griffin said that to earn a FICO score — the most important of the credit scores — people must typically have a credit history that is at least six months old. There are other scores, such as the VantageScore from Experian, that take less time. Experian can issue consumers VantageScores as soon as three months after they first build a credit history.
How did you build up your credit history?