Credit invisibility is a state in which a consumer doesn't have a credit score, having never applied for a credit card or taken a loan. The lack of a credit history can make obtaining a card or a loan very difficult, as the credit report is one of the first documents a financial institution reviews before making a decision.
And so the frustrating cycle continues: No credit history keeps a consumer from getting credit, and the lack of credit prevents the formation of a credit history.
According to data compiled by the Consumer Finance Protection Bureau in 2015, the most recently available, there are about 26 million Americans who are credit invisible, or about one-tenth of the U.S. population. Another 19 million have credit files too thin or too inactive to score, landing them in the same predicament as someone without any history to speak of.
Being invisible in this sense can cause numerous problems beyond difficulty obtaining a typical credit card or loan. Employers and landlords review credit reports before hiring or renting to someone; utility companies use these documents to determine whether they will require a consumer to make a deposit before setting up their services; and cell phone retailers may consider a credit report prior to making a sale, the CFPB pointed out.
Credit unions have the ability to reach out to those in their community who might have no or little access to credit. Assisting and providing resources to the credit invisible in your community is a noble effort that could help people in your area reach their financial goals while also strengthening your member base.
Help members determine their credit status
The first step in helping someone improve their credit status is to understand their starting point. Assist members in pulling their credit report and review what it says about their perceived creditworthiness. They may not realize they have a score, or they might find they have a different score than they would have guessed.
Invite members into your branch for personalized help in pulling their credit. Or, host a workshop at your branch or centralized location in your community to teach your members how to do this on their own. Educators Credit Union in Wisconsin took a similar approach after the Equifax breach to ensure members knew how to look up their report. But a major incident like this data hack doesn't have to be the impetus for implementing a program like this.
It may be helpful to understand where your credit invisible members live and who they are. The majority of credit invisible people around the country are younger, lower income or are part of a minority group. The largest concentrations of credit invisible citizens are often found in low-income neighborhoods.
Closely analyze reported information
A credit invisible person may actually have a small credit file. However, more often than not, an invisible person with a file typically has non-loan items making up most or all of their credit report. These might include child support payments, public records, delinquent utility bills or collections accounts. Many times, collections accounts are a result of unpaid medical or cell phone or cable debt, CFPB noted. As one might guess, these types of reported items typically don't paint the consumer in a positive light; chances are, if these are the only records on file, the resulting credit score isn't very high.
When helping members pull their credit reports, it's important to explain the significance of these non-loan reported items. If someone is technically credit visible, but negative information is the only thing making up his or her credit history, it's important they make an effort to turn their score around. Starting at the low end of the credit scale is in some ways worse than being invisible. At least the invisible person has some control over his or her entry product, or the item that begins their credit history.
Offer products and services to help build positive credit
One of the best ways a credit union can help members build or improve their credit histories is by providing them credit. Two examples include:
- Credit builder loans: Small loans that typically range from $600-$1,000 and are deposited into a locked savings account. Over six months to two years, the member repays the loan. At the end of the repayment period, he or she receives the sum in full.
- Secured credit cards: Cards with a credit line matching a pre-made deposit from the cardholder. The bank holds the deposit in a separate account, and once it's spent, the consumer can add more money to the card.
In both of these cases, it's important that the credit union report payments to the credit bureaus - without this step, the point is basically moot. As they make on-time payments, not only are these members building a positive credit history, but they are also building up their savings (in the case of the credit builder loans) or learning how to responsibly manage a credit card (as with secured credit cards).
Carefully craft your credit invisible lending program
Even though these forms of credit are relatively low risk, there's always some possibility of loan loss when working with people who have limited experience managing debt. As such, it makes good business sense to look into the member's history to determine how much to lend, and at what rate, the National Credit Union Association noted.
Of course, as many credit unions already acknowledge, there's more to a person than their loans, debts and on-time payments. There are many factors to look into, including:
- Employment.
- Residency.
- Income.
- Outstanding debts.
- Loan purpose.
Additionally, credit unions should have a plan in place to address payments that are not made on time, in full, or at all. This might include loss-protection insurance and a collections process.
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