Whether we like it or not, we live in a world where credit rules. But according to an Experian study, about 28 million Americans are considered “credit invisible.” The term, which sounds like something straight out of DC comics, refers to people who don’t have a credit score.
This can happen for a variety of reasons, but this issue should not be taken lightly as it can affect your ability to access many things, including an apartment rental, an affordable insurance policy, or even a mobile phone plan.
In this part, we’ll cover everything you need to know about credit invisibility, as well as how to fix it so you can live your best financial life.
How to become credit invisible?
Many people confuse credit invisibility with a thin credit record. Rather, when you have a thin credit file, it’s called “loan is not assessable.”
Unmeasurable creditworthiness means that although you have some credit history on your file, it is so poor that the credit bureaus (Experian, Equifax and TransUnion) cannot properly assess how risky a borrower you are, so they cannot rank you.
However, being credit invisible means you have no credit history at all. So, if you’re applying for a car loan, mortgage, or apartment rental, for example, the lender won’t find any results when they check your credit report.
Now you’re probably wondering how someone can’t have a credit score these days, but it’s more common than you might think. In fact, according to the latest data released by the Consumer Financial Protection Bureau (CFPB), millions of Americans are considered creditworthy.
So how can this happen?
Well, if you lead a cash-only lifestyle or if you are too young to apply for a loan on your own, you are probably invisible to credit.
That’s why.
The way credit scoring models work is that you are graded (scored) based on how well you have managed your credit accounts (student loans, car loans, credit cards, etc.).
If you have never opened a credit account in your life, there is little to report to the credit bureaus. And if nothing is reported, the credit bureaus see no need to open a credit file for you.
However, according to Experian, you can also become creditworthy invisible if you closed all your credit accounts and didn’t have any new credit transactions on your report for more than six months.
How a lack of credit can affect you
Lack of a credit score can affect you more than you think.
You may have difficulty renting a house or apartment
In addition to checking your income and a quick background check, most landlords also check your credit report. They do this to see how responsible you are in paying bills. If they can’t verify how risky a tenant you’ll be, you may have trouble getting a lease.
You could end up paying more on insurance
Unless you live in California, Hawaii, or Massachusetts, where this practice is prohibited, most insurance companies will take your credit score into account when calculating insurance rates. According to the Insurance Information Institute, insurance companies will give those with a low or poor credit score a higher rate because they are more likely to make claims than those with an excellent credit score.
You won’t be able to secure better terms or interest rates
In addition to restricting your access to many loan products, if you get approved for a loan, you are likely to pay a high interest rate. Why? Because lenders have no proof that you are a responsible borrower. This, in turn, will not only cost you more money in the future, but can also cause you to put off important milestones like buying a house.
5 ways to build your credit from scratch
As you can see, having no credit score can affect your life in many ways. Luckily, there are easy ways to fix this.
Get credit for things you’ve already paid for
One of the easiest and often overlooked ways to get a loan is to sign up for a service like Experian Boost™ or UltraFico, which looks at bills or bills that aren’t normally reported to credit bureaus to give you a score.
These include payments for subscription services, a mobile phone bill, and rent. In addition, in the case of UltraFico, you can also link your financial accounts, including checking, savings, and money market accounts, and use them as leverage for your account.
The best part about these services is that they are available for free and only report positive payment history, so they won’t hurt your credit history in any way.
Become an authorized user of a family member or friend’s credit card
Another quick way to get a loan is to ask your parents or a friend if they can make you an authorized user of their credit card.
When you become an authorized user of someone else’s credit card, you get access to the credit card associated with that person’s account, which you can use as if it were your own. However, when you ask someone to add you as an authorized user, you must remember to them financial habits.
If they treat their account responsibly and pay their bills on time, then it will help you raise your score almost instantly. But if they have a history of late or missed payments, your credit history may suffer too.
Here are more details on how an authorized user can help earn credit.
Apply for a secured credit card
A secure credit card works just like a regular credit card in that you can use it to make purchases, book travel, or pay for subscriptions. The difference, however, is that you must pay a deposit in order to use it, and this amount becomes your credit limit.
In addition, secured credit cards such as Visa® OpenSky® Secure Credit Cardwill not retrieve your credit report as part of the app. So you can apply even if you don’t have a credit score at all, and your payments will be reported to all three credit bureaus.
Here is a list of our favorite secure cards.
Sign up for a store credit card
Many experts do not advise this due to the high interest rates that these cards usually carry. To give you an idea, store credit cards tend to have interest rates above 24%, while regular credit cards carry an average interest rate of 19.68%, according to LendingTree.
However, because store credit cards are for purchasing items from that particular retail store, they are easier to claim than a regular unsecured credit card and your credit activity and payments are reported in the same way.
Apply for a Builder Loan
There are different types of loans for builders, however most of them work like this:
- You apply for a loan online, at a bank or at a local credit union. These loans are usually small, ranging from $500 to $1,000.
- Once you apply for a loan, the lender deposits the loan amount into an interest-bearing savings account or CD.
- Then you start making payments for a year or two – although there are longer terms.
- When you finish paying off the loan, the lender then releases the funds and pays you back, minus any interest or fees.
Basically, you get a loan after you pay for it, so this is a good way to get a loan and stay out of debt at the same time.
Connected: Is a loan builder loan right for you?
Summary
Being credit invisible can limit you in many ways. But fortunately, you can easily fix this. You just need to carefully evaluate your options and choose the one that best suits your lifestyle and financial needs.
Featured Image: StunningArt/Shutterstock.com
