There are good reasons why some people are credit invisible. According to the Consumer Financial Protection Bureau, more than 10 million of these consumers are under the age of 25 and are likely to be earning an income for the first time; They’re just beginning adult life, so it stands to reason they don’t have the long financial history that comes with time.
At the other end of the spectrum, spending tends to decline after a consumer retires, and many older Americans who may have had strong credit in the past can see their credit record shrink. In most cases this is not a problem as they are not trying to buy a new home or open other types of credit accounts.
More Creighton: Credit and Home Buying – What Every Generation Should Think About
Another group with little or no credit history are immigrants, who may have had credit accounts in their previous country, but that previous credit history does not carry over to the US system.
Regardless of the reason, consumers with limited or no credit histories will find it harder to obtain credit, and if they do, will likely pay more in interest and fees.
While your credit history is certainly important, lenders also check whether an applicant has enough income to repay, what the consumer’s total debt is, and whether they have enough cash for a down payment. So building a strong credit file isn’t a magic bullet — but it can really help. Here are five ways consumers can make credit visible:
First, become an authorized user on a friend or family member’s credit card. As an authorized user, you get your own card and share the main account holder’s credit limit and payment history. The most important thing is to ensure that both you and the main account holder are making payments on time and not depleting the balances. If managed responsibly, this positive proof of payment will appear on your credit reports and can improve your credit score. (And make sure everyone understands that this is a together account, meaning all users are responsible for charges even if the other person made the charge).
A second option is to use your personal recurring payment data. Today, consumers can report their rent, electricity, cell phone, and streaming service bill payments to the three nationwide credit reporting agencies (Equifax, Experian, and TransUnion) and see a positive impact on their credit scores. Services like Experian Boost help you do this automatically and across payment types; There are also rental information services.
Third, apply for a secured credit card. Many banks offer this option, which allows consumers to post a cash deposit as collateral, which usually becomes their credit limit. From there, consumers can charge the card for purchases and make regular, timely monthly payments and begin to build a positive payment history that is reported to nationwide credit bureaus.
Another option is to apply for a home loan. Many credit unions offer these types of loans, and they can be great for both building a consumer credit file and repairing damaged credit. Consumers borrow a small amount, which the lender then deposits into an account they don’t have access to. After the consumer has repaid the loan through a predetermined series of payments, this loan is then turned over to the consumer. However, before applying for any of these loans, make sure your lender reports payments to the credit bureaus.
More Creighton: First-time home buyers can benefit from having their rent reported
Finally, immigrants faced with building a credit score from scratch upon arrival in the United States have a fifth option. Applying for a credit card through Nova Credit converts a consumer’s international credit history into a US credit score. Although this service doesn’t yet work for immigrants from all countries, it can help create a US credit file.
It is important to note that once a credit file is created, it can take up to six months for a credit score to be calculated. So, adjust your home and mortgage loan application schedule accordingly.
Aside from these specific steps, credit-invisible consumers should also consider working with third-party credit advisory services like the Credit Builders Alliance. These advisors can provide financial advice and help consumers build their credit step by step.
Consumers considering buying a home should regularly check their credit reports well before applying for a loan. Consumers can do so for free (as often as weekly through the end of 2022) at annualcreditreport.com. Make sure you’re using the correct link – this is the official site for free reports that federal law requires credit bureaus to provide.
Building a healthy credit record can take time. But there are tools to get you on the right track.
Francis Creighton is President and CEO of the Consumer Data Industry Association based in Washington, DC