How people without a credit score benefit
Your credit score is like the bad girl in junior high. She is the guardian, the one who decides whether you are “in” or not. And let’s face it, unless the bad girl is really nice to us, neither of us really like her.
It sort of sums up what many Americans think about credit scores. They are the gatekeepers for everything we do, from renting an apartment to getting a job or getting a loan. If the gatekeeper thinks we’re fabulous, we’re offered low interest rates on personal loans, great credit cards with great rates and great perks, and we never have to fear credit checks. If the Guardian doesn’t see fit, we might get some of these benefits, but at much higher rates.
But what if the Guardian doesn’t even know we exist? What if we ran into her every day in the hallway, sat next to her in science class, and she couldn’t identify us in a queue?
This is what it is for about 20% of the American population whose credit cannot be assessed by the most common credit scoring models. According to the Consumer Financial Protection Bureau (CFPB), 8.3% of Americans’ credit records are considered incorrigible and an additional 11% (26 million people) are classified as invisible credit.
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Understanding how so many people are left in credit purgatory has a lot to do with the categories mentioned in the CFPB report.
Insufficient information: Simply put, these are credit reports that do not have enough detail to be used as an indicator of loan repayment capacity – either because there are too few accounts or because the payment history is not long enough. It’s not an uncommon place for young adults to hang out before borrowing money for school, renting an apartment, or getting their first credit card.
Stale: Those who have credit but haven’t used it for a long time fall into this category. You can avoid a stale credit report by regularly making small withdrawals from a credit card and paying off the balance immediately.
Being invisible when it comes to credit means that a person has no credit history at all, which disproportionately affects residents of low-income neighborhoods. CFPB research found that 30% of people in these areas are invisible when it comes to credit and 15% have bad credit records.
Who does it benefit from?
Unsurprisingly, predatory lenders benefit the most from the fact that 20% of Americans have bad or invisible credit. They are opportunists who know that a lack of credit is enough to exclude borrowers from traditional low-cost loans and are more than happy to exploit the situation.
Predatory lenders will tell you that the reason they charge the kind of interest rate that would make a loan shark blush is because so many of their customers are not paying their loans. If this were true, none of these lenders would still be in business.
Here are three examples of how these lenders get every penny from those without credit:
Payday lenders: The payday loan industry is the star kid of predatory lending. A report from InCharge Debt Solutions shows that 12 million consumers take out payday loans each year, a practice that costs them $ 9 billion in fees. And 70% of payday borrowers spend their cash advance on bills and other necessary monthly expenses. The problem is clear: if they borrow money at a high interest rate to pay for their necessities, what are they going to do next month? The average interest rate on a payday loan that is paid off within two weeks is 391%.
Buy here, pay here: These car dealerships have long been the go-to for buyers who have been denied a car loan due to credit problems. Buyers find a car on the lot and the dealership sets up internal financing. Here are some of the associated risks:
- Buyers pay a much higher interest rate than if they could have borrowed from a bank or credit union.
- Unlike traditional lenders, Buy Here, Pay Here dealerships often charge (and lend) more than the value of a car.
- Not all Buy Here, Pay Here dealers report all positive payments to the credit bureaus, which means buyers may still be without credit after paying off the car in full.
Rent-buy: No credit? No problem for option-to-buy rental companies across the country. These multi-billion dollar businesses allow those without credit to “rent” items such as appliances, computers, jewelry, furniture, with weekly and / or monthly payments.
Consumer protection group, PIRG describes the typical transaction: Someone walks into the store looking for a TV to rent. They choose a model with a market value of $ 220 and it requires 78 weekly payments of $ 10, for a total of $ 780. If that customer makes all 78 payments, they just paid an additional $ 560. If the customer could have used a credit card to purchase that same TV, even at a high 25% APR, they would be able to pay it off at $ 10 per month in 30 months and pay around $ 80 in interest.
If you are among the 20% of Americans with bad or invisible credit, there are a number of steps you can take to increase your credit. Try to apply for a secure credit card. Or, you could apply for a credit-builder loan which, as the name suggests, is designed to build your credit.
If you have a credit card or other form of loan, making regular and on-time payments will help your payment history, an important factor in your credit score. The other is credit usage, which is the balance you carry over the total credit you have. While you should try to keep it below 30%, if you don’t spend any money on your credit card at all, your usage rate will be zero, giving lenders no information on how where you manage your debt.
The important thing is to take concrete action to build a credit report and then increase your score to something you can be proud of. This way, you should be able to avoid predatory lenders altogether.