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Dec

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Being credit invisible is defined has having no credit score and/or no credit report from any of the three major credit bureaus. According to the Consumer Financial Protection Bureau (CFPB), a recent report (May 2015) discovered 26 million adults have no credit history. Another 19 million adults have credit files that are so thin that they are credit unscorable by traditional scoring models. The data analyzed in the report comes from 5 million de-identified records from the year 2010 purchased by the CFPB from the credit bureaus.

Reasons for Being Credit Invisible

The CFPB report found that the majority of those without credit scores are young. This is perhaps because they’ve not had the time to build up credit. The credit files identified as invisible from young people were split evenly between those with no credit history and those with thin files. About 80% of those 18-19 years old are credit invisible.

For those people who are lost in the credit mix for causes other than that they are young, additional reasons for being credit invisible include:

  • Consumers who have had bankruptcies are more likely to abandon the use of credit, having been burned by its use in the past. After 10 years, credit accounts fall off of credit reports. If enough time elapses, the credit histories of the bankrupt can turn into blank slates, should they not reenter the world of credit.
  • Consumers who are recent immigrants to the country may not have enough time to build up credit or are just learning to use credit.
  • If you’re an older person who just operates on a cash basis, you may have not used credit in awhile.
  • If you are low income, you are more likely to be credit invisible.   While credit files do not contain income information, the zip code contained in the consumer’s address is on the report. The report could estimate income based on the census-track income information.
  • The report also found that African American consumers, Hispanic consumers and those living in low-income neighborhoods are most likely not to have a FICO score. 15% of African American and Hispanic consumers have no credit score versus 9% of Caucasian consumers (adding together both no credit files and thin credit filed consumers). These differences were noted across all age groups. Again, the race of the consumers was calculated through zip code and census-track information. Race information is not contained in credit files.

Why Being Credit Invisible is a Problem

Your credit score matters. People who are unscorable lack access to basic credit instruments like credit cards, auto loans and mortgages. An unscored consumer may find himself or herself outside of the economic mainstream, forced into using products for the unbanked, which are known to be more expensive than those using traditional banked products.

In addition to lacking a basic access to traditional banking products, a lack of credit score will hamper efforts to get low cost insurance. Almost all states in the U.S. allow some kind of credit score considerations when calculating premiums. Having no credit score is the same as having a bad credit score, so those who are credit invisible may find themselves paying higher rates.

In addition, over 40% of employers pull credit reports when assessing potential new candidates for jobs. Having a thin or no credit file might possibly eliminate your prospects for coveted employment if your job-seeking competitors have a full credit file.

Alternative Scoring Methods

FICO has recently introduced new scoring models for those who have no credit. With this newer scoring system, FICO estimates that 15 million more consumers will have a credit score. The new scoring system will include the payment history of rent and utilities and cell phone bills. However, this alternative scoring system will not help people who do not have any history at all.

Tips for Building Credit if You Have a Thin or Non-Existent Credit File

To make sure you have a credit file, you need to have credit accounts. These accounts need to be open for 6 months, and the bank must report your account history to these bureaus in order to score with the major credit bureaus in a FICO or Vantage credit score. Having one account lands you in the thin file category, so you really need more than one account, you should aim for 2 or 3.

Where to start building credit? In order to know where you stand credit-wise, you need to see what’s on your credit report. You can get your credit reports from all three credit bureaus at annualcreditreport.com.   If you truly do not have any credit, you may even find that you have no credit report. If this happens, don’t panic – follow the steps listed below:

  • Get a secured credit card. If you have no credit score, you may find it difficult to get traditional credit accounts. Secured credit cards are an excellent way to build credit. The bank you currently do your banking at is likely to have a secured credit card program, and you can also do some comparison-shopping at bankrate.com, and creditcards.com.
  • Join a credit union. A credit union is an excellent place to start to build credit. Almost everyone qualifies to belong to one credit union or another and typically joining is as easy as depositing $20 into a saving account. Once you are a member, you can qualify for easy-to-get credit accounts such as personal loans or even unsecured credit cards.
  • Pay on time. Once you do have a new credit account, it’s important to pay this account on time, as payment history is 35% of your score.