A friend of mine, Brandon, pays $392 per month for his used 2010 Honda Accord. In five years, he’ll own the car outright.
Nevertheless, Brandon is one of approximately 54 million Americans who are categorized as “credit invisibles.” These are people who have a sparse credit file or participate in financial activities that don’t build credit scores — such as paying phone and utility bills — thus making them invisible to credit agencies, according to the Political and Economic Research Council.
An effort to make these people visible has made its way before a House committee in the form of the Credit Access and Inclusion Act (HR 2538), which would enable phone, utility and cable companies to report positive payment information to major credit bureaus. It has the potential to decrease the number of credit invisibles from 54 million to approximately 5 million.
For Brandon, his “insufficient credit history” cost him an 18 percent interest rate on his monthly car payments. By the time he is finished paying for the car in 2019, he will have paid $12,000 more than the base price because he was viewed as too credit risky.
A disproportionately high number of invisibles are young adults like Brandon who haven’t established a credit history, ethnic minorities, people with low incomes and immigrants with minimal financial history from their countries of origin, according to a PERC study that emphasized the need to “redefine” credit by offering alternative data to credit bureaus.
People with no payment information in their credit history are treated by lenders with the default notion that someone with no score is a high risk. But many of these people are low-risk, active consumers who work and pay rent, utility, cable and phone bills. These payments are not reported to credit bureaus, however, unless bills go unpaid. If they do, these consumers can suddenly face serious financial risks, including inflated interest rates, deposit requirements and monthly payments.
Worse, according to the Society for Human Resources Management, more than 60 percent of employers run credit checks on job candidates and in some cases disqualify already financially shaky prospects from earning a more stable source of income.
It’s a difficult cycle and an uphill battle: You need credit to get credit.
For Brandon, registering for a credit card with an electronics store barely affected his credit score, with his purchases and payments reported to only one of the three major credit bureaus.
Jonathan Weaver, a counselor with the Mon Valley Initiative, a Homestead-based nonprofit economic development coalition, said many of the people who come through his office don’t understand how credit works because no one in their families told them about it. It’s a multigenerational problem. Minimal financial counseling and a lack of early planning and education can be crippling, he said, especially for potential homeowners.
“We don’t teach our children some of these economic things in school, and I’m not sure a lot of kids learn about it at home, so where will people learn about it?” he asked. “It’s especially hard once life gets going to correct it.”
Mr. Weaver emphasized the importance of early financial education and literacy but also said unforeseen circumstances — such as the loss of a job or sudden medical expenses — can derail even the most careful planning. Recovering credit credibility can be an arduous process.
“Life often gets in the way and, when situations unravel beyond our control, it’s difficult to get back,” he said.
The House bill might help, but a fundamental solution would be to ensure that all young people are financially literate. Some nonprofits and other organizations sponsor financial literacy programs, but the most obvious way to make sure they reach most young people is to weave them into coursework during the later years of high school and the early years of college.
Clarece Polke is a staff writer for the Post-Gazette (firstname.lastname@example.org, 412-263-1889).