Building Credit When You Have None

By Nancy Wilberg Ricks, Senior Policy and Communications Strategist, NCLR

Photo: Frankieleon, Creative Commons
Photo: Frankieleon, Creative Commons

Do you have a credit score or credit history? If not, you’re “credit invisible” and your choices are much more limited than for those who do have credit. You won’t be able to purchase a home, and you’ll likely have challenges getting the apartment or job you want.

But you are not alone. Roughly 45 million Americans are not “credit scorable” or off the credit map entirely.

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According to a recent report by the Consumer Financial Protection Bureau (CFPB):

  • 30 percent of people in low-income neighborhoods are credit invisible, compared to 4 percent of people in higher-income neighborhoods.
  • 15 percent of Blacks and Hispanics are credit invisible (compared to 9 percent of Whites and Asians).
  • An additional 13 percent of Blacks and 12 percent of Hispanics have unscored records (compared to 7 percent of Whites).

These differences are apparent among all age groups, suggesting that these differences surface early in adults’ lives and can persist.

The CFPB’s report confirms what NCLR has known for some time: potentially creditworthy individuals are often overlooked because they have a thin credit file or no file at all. While they might have strong saving and spending behaviors, many Latinos can encounter challenges gaining traction in traditional credit scoring models.

A 2010 NCLR study indicated that many participants were turned down, often repeatedly, before they were approved for a credit card. One respondent said:

I applied for a credit card, and they said they would call but they never did. So I called to see what was going on because I had one in my country and I always used it responsibly. Like my dad always said, sometimes it is better to have credit than money. I applied for it and they didn’t give it to me…They told me it was because I didn’t have a credit history and nobody knew me. That’s understandable, but like I said to them, based on the amount of money I have they should give me a card, even if it’s just for $100. But they didn’t give it to me.

There are solutions, though. Some are advocating for credit reporting companies to incorporate additional scoring characteristics such as rent or other bill payments into one’s credit score. This can be effective but complicated. In the case of utilities, for example, some families pay the heating bill in fits and bouts, and that erratic payment activity could undermine efforts to help the most in need. It could even open families up to predatory market players and fraud.

HousingDiscrimination_blogpic_newA different solution is being offered by lenders such as the Mission Asset Fund (MAF). Located in San Francisco, MAF provides zero-interest loans through lending circles to help borrowers begin building credit and accessing safe small-dollar loans. Participants are required to take MAF’s online financial training courses before joining a lending circle. Everyone in the lending circle makes the same monthly payment ($50–200), and MAF reports this activity to the credit bureaus.

MAF stands out as a very successful model that helps individuals build credit in a nontraditional way. These alternatives are essential for many Latinos and new immigrants in particular, who might have limited experience with the mainstream credit system.

The CFPB’s report draws attention to an enduring problem and will hopefully generate new policy improvements to the system. Right now, some families are certainly qualified for better financial products but could never access them because they’re not in the mainstream. Advances here could mean the difference between a prime loan or a fringe payday loan, putting families on vastly different trajectories in their financial well-being.

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