Twenty-six million American adults lack a credit report, according to a study released Tuesday by the Consumer Financial Protection Bureau. The report also shows that 19 million other consumers in the U.S. have credit reports but are considered “unscorable” by most major credit scoring models.
The CFPB found that 10% of American consumers don’t have credit report with any of the three major credit bureaus, making them “credit-invisible.”
“When consumers do not have a credit report … the impact on their lives can be profound,” CFPB director Richard Cordray said in a call with reporters. Not having a credit report can make it difficult to rent an apartment, secure certain jobs or access traditional financial products like loans and credit cards.
The CFPB report also found that black and Hispanic consumers, as well as consumers living in low-income communities, are significantly more likely to be credit-invisible than white and Asian consumers.
Dara Duguay, executive director of Credit Builders Alliance, an organization that helps local nonprofits report clients’ borrowing activity to the major credit bureaus, tells the Nerds: “A disproportionately large number of these individuals [people with nonexistent or limited credit histories] are low-income, and many live in areas underserved by traditional financial institutions. They depend on predatory financial service providers who do not report their borrowers’ on-time payments.”
Duguay adds, “Many of these low-income households find themselves trapped in a vicious credit cycle.” They can’t access conventional loans and credit cards on good terms, making it difficult to establish a credit profile at all.
What it means to be ‘unscorable’
Unfortunately, simply having a credit history isn’t necessarily enough to generate a credit score, a three-digit number that lenders use to assess creditworthiness. The CFPB report found that in addition to the 26 million consumers in the U.S. who are credit-invisible, 19 million more Americans are “unscorable.”
“People can have files but still be conventionally unscorable because they do not meet the minimum criteria that some models require in order to generate a score,” Jeff Richardson, a spokesman for VantageScore, tells the Nerds in an email statement. “That criteria is to have at least one credit account active for at least six months or to have had credit activity in the past six months.”
VantageScore produces one of the major credit scoring models used in the United States.
Without enough recent credit history to create a credit score, these consumers often effectively find themselves in the same “vicious credit cycle” Duguay described.
How to develop a solid credit history
Many people end up credit-invisible or unscorable because they live in places where access to traditional financial services is limited. But that’s not the case for everyone, and consumers can take steps to establish a solid credit history, including:
- Begin interacting with credit as soon as possible. This includes loans and/or credit cards. Paying bills like rent and utilities usually doesn’t build a credit profile, so borrowing money responsibly is key.
- Pay your bills on time and in full.
- Don’t use more than 30% of the available credit on any of your cards at any point during the month.
- Wait at least six months between credit card applications.
Learn more about avoiding credit invisibility.
Image via iStock.