Why is it so hard to build credit these days?

Posted on: 07 June 2019

What are credit scores like in the United States?

According to the Center for Financial Services Innovation’s 2018 US Financial Health Pulse study, 27% of Americans do not have credit scores above 700. Specifically, 15% have credit scores from 700-600 and 12% have credit below 600.

Even more noteworthy than the large percentage of Americans with bad credit, is the number that don’t even know their credit score, a staggering 6%.

What about people who don’t have a score?

Millions of Americans with limited credit histories are considered either credit invisible or unscorable.

  • Credit invisible — no records with the nationwide credit reporting agencies
  • Unscorable — have records with the nationwide credit reporting agencies, but insufficient history to create a score. This could be due to the newness of the record (less than six months) or it is stale (no payments in the last six months)
  • These people face a significant challenge when it comes to qualifying for a traditional loan.

    What populations are affected?

    The U.S. Consumer Financial Protection Bureau found that 11%, or 26 million adult Americans, are credit-invisible and 8% of adults, or 19 million consumers, have an unscored credit record, with about half having insufficient history and half having stale history. So, 1 in 10 Americans don't have a credit score.

    People having a hard time getting credit for the first time are predominantly young Americans, new immigrants, and lower-income Americans. Immigrants struggle because you can’t transfer your credit history to the United States from another country. New immigrants often have to build a new credit history from scratch upon entering the United States. Young Americans also have a hard time transitioning out of credit invisibility. The CFPB found that more than 90% of consumers transition out of credit invisibility in their mid to late twenties. When they do, they may not be doing it successfully, Transunion says that 43% of millennials (age 18-36) have subprime credit. On top of that, people from lower-income backgrounds have a tough time transitioning because they don’t always have the assistance of an adult who can cosign or set them up as an authorized user with good credit standing to guide them into the credit world.

    Has it always been this hard to get a credit card for the first time?

    It hasn’t always been hard to get a first credit card, especially for young, college-age Americans. Gone are the days where you could get a free t-shirt or Subway sandwich coupon for filling out a credit card application on campus.

    The Credit Card Accountability Responsibility and Disclosure Act (aka Credit CARD Act of 2009 ) was passed by Congress and signed into law by President Obama. It went into effect in 2010 and aims to protect all consumers from deceptive practices and harsh rules created by card issuers. It also changed the way that college-age students often gain access to their first credit card. Creditratings.com explains that the CARD Act protects students in the following ways:

    • Restricted on-campus credit card marketing and at college-sponsored events
    • Companies can’t send consumers under 21 credit card offers, unless they opt-in
    • Financial institutions have to consider an applicant’s ability to pay before issuing a card
    • Restricted fees on low-balance cards for people with bad credit
    • People under 21 can’t open a new credit card account, unless they get a cosigner
    • Credit bureaus can’t supply reports on people under 21 without parental consent

    As a result, the percentage of people whose entry product, before age 21, was a credit card went from roughly 38 percent for people born in 1988 to about 26 percent for people born in 1992; however much of that was made up by that later group by people 21-24 who entered and got a credit card first.

    How do people establish credit for the first time?

    Since the CARD Act went into effect, consumers younger than 25 transitioning out of invisibility with a credit card has decreased.

    According to the CFPB, people establish their consumer credit record in several different ways:

    • Car loans and leases: 8.9%
    • Credit cards: 37.6%
    • Mortgages: 1%
    • Personal loans or other loans: 5.3%
    • Retail loans, including retail credit cards: 14.1%
    • Student loans: 15.8%
    • Collections accounts from third-party debt collections companies: 12.0%
    • Other non-loans: public records, delinquent utility bills, child support payments, etc: 3.0%

    Many of these methods used for establishing credit are often done with the help of a parent co-signer, but this is not always an option for people in low-income or even middle-class neighborhoods, whose parents may not have a good credit score.

    You will also notice that not all of these methods of establishing credit for the first time let the borrower start out with positive credit history, especially when it comes to credit histories that are established by collections agencies and court records.

    Has it always been this hard to get mainstream credit?

    “Lower-income Americans increasingly lack credit cards,” explains a Harvard study . Between 2007 and 2015, credit card accounts originated for people with lower scores fell by 50% and credit limit amounts fell by 31%. They are increasingly less accessible for people with lower credit scores.

    The same study shows that percentages of people with a credit score below 680 originating new credit cards went from 19.7% in 2007 to its lowest at 4.2% in 2009, back up toward 9.9% in 2015.

    So, it's not just you. It is harder to gain access to mainstream credit that it used to be.

    How can YOU establish credit or improve your poor credit?

    So, half of Americans either have subprime credit or no score at all. What do we do?

    Don’t be among those who are clueless:

    • Check your personal credit score
    • Get your free credit report
    • Know what's on it and fix any inaccuracies*

    *If you find negative items or inaccuracies on your credit report, the following can help to remove that information without spending money. Dispute the information with the appropriate credit bureau or initiate a dispute directly with the reporting business. If those are not an option for you, you might need to hire a professional credit repair service. Wanting to improve your credit score with either of the options mentioned will take time; stay patient and before spending money, make sure you explore all available options.

    The Consumer Financial Protection Bureau suggests three ways to establish credit from scratch: retail or store credit cards, a secured credit card, and a credit builder loan. The latter two require a security deposit to be paid to “secure” the loan or card, unlike a typical unsecured credit card which doesn’t require a cash deposit. Fig's Credit Builder Loan is designed to help people build credit when it is hard to come by. The loan helps people establish or repair their credit as they repay the loan with monthly payments. In eight months, the average Fig customer saw a 47 point increase in their credit score. This means the difference between access to only payday-type credit and mainstream loans. See image below.

    Additional ways that people can start building credit from scratch to move out of the ‘credit invisible’ is by getting set as an authorized user on a parent’s credit account, trying to get your rent payments , or other monthly payments like utilities or mobile phone bills reported to the major bureaus.

    How long does it take to see changes in your FICO score?

    According to FICO, the minimum requirements for a score with a credit bureau include having a minimum of one account open for six months and one account reported to the bureau within the last six months. So, in less than one year, you can be in a much better financial place.

    You can’t build credit in an instant. Then it would be called “getting” credit, instead of “building” it. It can take about six months of payment or revolving credit history to get a score in the first place. However, it's just for bragging rights. There are many rewards, including low-interest rates on credit cards and other loans, which saves money in the long run. You can get better car insurance rates, easier approval for rental properties, with lower security deposits. That's not to mention the peace of mind that if you need to borrow in an emergency, you can.

    About the Author: Anne-Marie Hays manages the payday loans blog for BestCompany.com , an independent, impartial consumer review site.

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