The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.
The world of consumer credit is filled with phrases and terms that are what many would consider to be industry jargon. That means the terminology isn’t often used outside of the context of a credit-reporting industry related discussion. One of those terms which has garnered much attention over the last several years is “credit invisible.”
According to the Consumer Financial Protection Bureau (CFPB) a credit invisible is a term used to describe a consumer who either has no credit report or an otherwise limited credit report. It’s not a pejorative term by any means. It simply means your financial activity, for one reason or another, is off the mainstream credit grid. Consumers who are credit invisible either have no information on their credit reports or have insufficient information in order to obtain a credit score under legacy credit scoring systems.
Being a credit invisible has several disadvantages. Consumers who have no credit reports, no credit scores or limited credit information may find it harder to access competitively priced mainstream credit or, at the very least, will have to go through additional steps during the underwriting process that consumers who have well-established credit histories will not have to endure. To that end, there are several ways for a consumer to become credit visible.
Secured Credit Cards
A secured credit card is an inexpensive and effective way to establish a credit report or to build on an otherwise thin credit report. With a secured card you make a deposit with a bank or credit union and they will issue you a credit card with a credit limit that is equal (to or very close) to your deposit. So, if you make a $500 deposit you will be issued a card with a $500 credit limit. As long as you choose a secured card issuer that reports to all three of the credit reporting companies, your account will be added to your credit reports.
Credit Builder Loans
A credit builder loan is a small dollar loan normally extended by credit unions. These loans have one purpose, which is to help you build your credit reports. The loans are normally less than $1,000 and you’ll have to pay it back within a year to two years, although there are some exceptions. The monthly payments you make to the lender will be reported to all three of the credit reporting companies (verify this in advance with the lender) and, thus, will also help you to build credit.
When you co-sign for a loan or a credit card, you will become a liable party on the account or, formally, a “co-obligor.” Lenders commonly report account information about co-signers to the credit reporting companies. This can help you to build your credit reports and credit scores.
There is something to keep in mind, however. When you co-sign, you will be legally responsible for the repayment of the debt, even if you’re not the person driving the car or using the card or living in the house. In fact, the co-signer has the same liability as any other signer on an account. So, while co-signing for credit can absolutely help you to become credit visible, make sure you’re comfortable taking on the debt obligation.
Including Unconventional Data in Your Credit Reports
Over the course of the decade, unconventional data has become a larger part of a consumer’s credit report. The type of information that has traditionally been reported to the credit reporting companies has been furnished by either financial services organizations (e.g., banks, credit unions, or credit card issuers) or debt collectors. This has changed in recent years, as more unconventional information becomes part of consumer credit reports. And consumers have more control over the addition of this type of information.
For example, the VantageScore models have always included data such as rent, utility and telecom payments (when they are present on a credit file), which can improve a credit score. Experian Boost allows consumers to add their utility, Netflix and phone account information to their Experian credit reports for free. Any credit scoring systems that consider this type of data could see their credit scores increase as a result. eCredable Lift is a fee-based service that allows you to add utility, phone, internet, cable and satellite TV accounts to your TransUnion credit report. Boost and Lift are both credit building options that can help consumers to improve their credit scores. And, like the VantageScore models, these options can also help credit invisibles to become more visible.
According to a VantageScore study, as recently as 2018, 40 million consumers in the United States are unscoreable using legacy credit scoring models. These consumers may be choosing to live with limited exposure to consumer credit or they may be otherwise unable to procure credit from mainstream lending sources. Either way, a lack of exposure to traditional lending sources could mean relying upon more expensive alternatives, such as asset borrowing or payday loans.
Consumers who build solid credit histories by paying their obligations on time and responsibly using credit card accounts will earn and maintain solid credit scores and remain “visible” in the credit reporting and lending environments. By doing so, these millions of “credit visibles” have the ability to leverage what are historically low interest rates on auto loans, mortgages, and other forms of credit. All of the aforementioned credit building strategies can help you to build both your credit reports and your credit scores in order to have access to these opportunities.