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Paths to Credit Access for the 'Credit Invisible'

Image: Paths to Credit Access for the 'Credit Invisible'
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Friday, 09 February 2018 02:59 PM Current | Bio | Archive

Obtaining approval for a credit card can be an arduous and downright depressing endeavor, especially for those with poor, thin, or no credit histories.

Such people are not always poor money managers. In fact, some of them have never even had a chance to manage their own finances before, because they only recently became adults.

The Credit Financial Protection Bureau (CFPB) released a report that estimates that 26 million consumer-age individuals are credit invisible, or have no credit scores whatsoever.

A further 19 million have data that was stale or insufficient to accurately report a credit score. With a credit score so important for assessing creditworthiness, there are effectively 45 million people in the United States who may be denied credit cards, loans, jobs, or rental agreements due to the absence of a single data point about them.

The most likely demographic to have no score, or an insufficient one, is unsurprisingly, young people. The proportion of invisibles within those who are 18 or 19 is in the mid-sixty-percent range, and that number drops precipitously in the next age range, that of 20- to 24 year-olds.

Rates also diverge along racial lines, with Black and Hispanic consumers having greater rates of invisibility than those that are White or Asian.

Moreover, areas with high rates of poverty tend also to have high rates of invisibility. The inability to obtain affordable and fair credit may lead those in such areas to turn to usurious products, such as payday loans, that only exacerbate their poverty by charging unsustainable interest rates.

Finally, the provisions of the Credit CARD Act of 2009 limit credit application approvals only to those who can demonstrate sufficient income to pay for purchases or have a cosigner. For applicants under 21 years of age, those CARD restrictions make it especially challenging to obtain a card.

While the Act began with the good intention of preventing predatory lending practices, it has also had the negative side effect of thwarting credit newcomers from obtaining credit, at least with any ease.

The Traditional Credit Score – and Its Alternatives

The traditional credit score, and its contributing data, is part of the problem. Also known as the FICO score, this figure is based on a consumer’s past credit performance, including their credit limits and how they utilize those, the length and number of open card accounts they held, their on-time payment history, and the number of credit applications they made. This score clearly does not apply well to those whose backgrounds include zero credit history, zero credit utilization, zero lines of credit, and zero payments.

But such consumers almost certainly held accounts other than those for credit products, which likely left a trail of possible alternative data sources that may be used to generate a credit score. In 2017 the federal Consumer Financial Protection Bureau, started to examine these sources for their utility in helping certain consumers.

As a result, several financial technology, or “fintech,” companies now aim to solve the problems faced by credit invisibles. One such company is Petal, which analyzes a consumer’s cash flow to determine whether credit could fit into the applicant’s financial life without causing insolvency. Another fintech, Deserve, has a similar mission, and uses “alternative data” techniques to determine creditworthiness. The data they examine includes withdrawals, transfers, and deposits from bank accounts, as well as payments for phone or utility bills. Deserve also offers credit cards to non-citizens of the U.S., so long as the applicant is either an international student or permanent resident.

Traditional Avenues to Obtain Credit without a FICO score

If relying on unproven fintech startups to obtain credit makes you nervous, there are other ways to get a credit card without a FICO score from more traditional sources.

One of the most popular is through secured credit cards. Like regular cards, these offer the user a line of credit against which they can borrow, but they require a refundable security deposit as a demonstration of good faith. Provided payments are made on time, these products are an excellent avenue to getting credit, and a useful tool for building a credit history. However, when obtaining secured credit, confirm that the card’s activity will be reported to credit bureaus; without that step, the hard work of getting the card and paying off its purchases will be for naught, because would-be lenders will not be able to see the data that is generated about you.

Another avenue is to become an authorized user on someone else’s account. This allows you to make charges on an established individual’s card, but that individual must agree to be responsible for your debt in the event you do not pay it off in a timely way. The authorized user, then, faces the risk that poor credit decisions on your part will reflect negatively on the authorized user, even if the authorized user themselves is financially responsible. It may be challenging to find a friend of family member who is prepared to take that risk on your behalf.

Other options include:

  • Student credit cards, which are available to attendees of college. Unfortunately, as with a secured credit card, a cosigner may be needed, unless the student can produce evidence of sufficient income. The cosigner, usually a parent for students, risks excessive and irresponsible charges by the applicant. Top offers even come with rewards that can earn cash back or airline miles.
  • Credit unions, which may be a good alternative source for credit-building loans or cards. These institutions tend to be more community-focused than the big banks, and they may be more willing to work with both the underbanked and younger applicants. They might also be more open to accepting alternative data as a demonstration of creditworthiness.
  • Store credit cards, which offer one option both to buy at certain stores and to build a credit history. They act like credit cards for the purpose of credit scoring, and their minimum requirements as far as credit history and income are generally more lenient. However, they carry the same risks and benefits as other credit cards; indeed, their interest rates on unpaid balances may even be higher than for many other cards.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.

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Obtaining approval for a credit card can be an arduous and downright depressing endeavor, especially for those with poor, thin, or no credit histories.
paths, credit, access, invisible
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2018-59-09
Friday, 09 February 2018 02:59 PM
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