Being invisible to the financial system might not sound like a bad thing.
But for some people on low incomes, the consequences are profound, locking them out of basic services like credit cards or mobile phones and often forcing them to pay over the odds for their energy bills.
Establishing a credit history is an important financial step to take. Without credit, you may be deemed “credit invisible,” which can be as difficult as it sounds.
About one in 10 adult Americans are credit invisible, according to the Consumer Financial Protection Bureau.
When you’re credit invisible, you can get by making everyday purchases with cash and debit cards. But you could have a harder time accessing credit products and have to delay important milestones, like buying a car or a home, as a result.
What is Credit Invisible?
A person is considered “credit invisible” if they do not have a credit history or record with any of the three major credit agencies (Experian, TransUnion, and Equifax).
As a result, the person is ‘invisible’ to lenders because they don’t know anything about them from their credit history. This means that when determining whether to approve you for a credit card, loan, mortgage, or even a flat, lenders have little information to base their decision on.
Why Does Being Credit Invisible Matter?
Your capacity for timely bill payment and debt management is reflected in your credit report.
Lenders, creditors, and other parties may find it challenging to evaluate your creditworthiness, sense of responsibility, reliability, and ability to control your exposure to risk without this information.
Credit invisibility is brought on by a lack of credit reports. You may not have any credit reports if you don’t have any history of using consumer credit, which means you haven’t taken out or paid back any loans, credit card balances, or other forms of consumer credit.
How Credit Invisibility Affects You
Inability to get a credit score.
Since credit scores are based on the data in your credit reports, you cannot obtain a credit score if you don’t have one. 90% of the biggest lenders utilize FICO® Scores, which need 180 days (six months) of credit activity (or “credit visibility”) to be calculated.
Problems with credit applications.
Credit reports and ratings are frequently used by lenders to automate lending decisions.
When you have no credit history, lenders must examine your credit applications using a labor-intensive procedure called manual underwriting.
During this process, a loan officer manually reviews your financial records to determine whether you have a good chance of repaying your loans. A lot of the information needed for underwriting is contained in credit reports and scores, thus automated loan decisions are frequently made considerably more swiftly.
Difficulty with emergency loans.
Being credit invisible may restrict your alternatives when you need to borrow money quickly. This is because rapid or instant credit approvals increasingly depend on credit reports and credit ratings.
This implies that people who lack credit frequently turn to payday loans, auto title loans, and other pricey (and occasionally predatory) lending choices when they require immediate cash or credit.
Higher security deposits.
When you apply for an apartment, landlords frequently perform a credit check.
Similarly, cable companies and internet providers frequently do so when you sign up for service.
In both situations, it aids the landlord or service provider in determining whether to work with you and, if so, how much of a security deposit to charge you for a flat or leased item like a wireless modem or cable box.
Credit invisibility is obviously not the same as having bad credit, and it probably won’t cause a company to refuse to work with you. But in many circumstances, the absence of a credit history might give rise to the need for a sizable security deposit.
How Do I Stop Being Credit Invisible?
There are a number of credit-building products available that you can take advantage of to build your credit visibility. Let’s have a look at them.
Become an authorized user on a friend’s or family member’s credit card.
You receive your own card when you are an authorized user on someone else’s account, but you also share the primary account holder’s borrowing limit and payment history.
The positive payment history of the account will show up on your credit reports and could raise your credit scores as long as it is carefully managed, with no missed payments or maxed-out amounts.
Apply for a secured credit card.
With a secured credit card, you make a cash deposit as security; normally, the size of this deposit determines your credit limit.
The national credit bureaus will record a positive payment history for you if you pay your bills on time and in full each month. This will eliminate your credit invisibility and put you on the path to having good credit scores.
Seek a credit-builder loan.
These specialized loans, which are offered by many credit unions, are made to help those with bad credit and those with no credit at all create strong payment histories while also saving money.
With a credit-builder loan, you take out a modest loan—typically less than $1,000—but the lender keeps the money in an account so you cannot access it (If you don’t pay back your loan as scheduled, the lender may keep the full amount borrowed.).
The savings account, presumably including any interest that has accrued, is given to you once you pay off the loan in a series of monthly installments (usually lasting no longer than one year).
Your payments are also noted in your credit reports with the national agencies, making you “credit visible.” Make sure the lender reports payments to the credit bureaus if you’re thinking about taking out a credit-building loan; not all do.
Retail store credit cards.
Credit cards are widely available at petrol stations, department stores and retail chains.
These cards are often simpler to get and have smaller credit limits. They are an alternative if you want to establish a spotty or nonexistent credit history because of this combination.
Other Ways to Increase Your Credit Visibility
Providing rent payments and other less common payment information to credit bureaus
You make certain payments that credit reporting agencies don’t now know about, but that may be recorded to show a history of on-time payments.
This information can include monthly rent or phone bills. By choosing to participate in self-reported payments through a business that provides this service, you can also take advantage of this opportunity.
Before signing up for such services, be careful to complete your research as fees and conditions can be involved.
Final Thoughts
Living with a non-existent or limited credit history can be a significant barrier to financial opportunity.
However, every individual deserves the chance to reach their fullest financial potential. Building financial independence is dependent on having low debt levels. As such, the use of credit should be balanced with your income.
The solution to this issue lies in a combination of credit education and the use of new relevant information to help build out credit files and improve financial access.
