26 Million Are ‘Credit Invisible’

Roughly 45 million adult Americans are living so far off the credit grid they don’t have credit reports or scores, the Consumer Financial Protection Bureau said in a report released Tuesday.

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One in 10 consumers — about 26 million people — are what the bureau calls “credit invisible” because they haven’t used the types of credit — mainly credit cards and loans — that trigger the creation of a credit report.

Another 19 million have credit reports, but the information is so scant or old that scoring formulas can’t come up with a reliable credit score. Consumers with thin credit histories may not be able to get credit, or if they do, are likely to have to pay more for it.

“A limited credit history can create real barriers for consumers looking to access the credit that is often so essential to meaningful opportunity — to get an education, start a business, or buy a house,” said CFPB Director Richard Cordray.

But people who fall into the credit gulf pay the price in other ways, too. Employers sometimes look at credit reports when deciding whom to hire or promote. Landlords may use credit reports to decide whether to rent to a tenant. Some insurers use credit reports when they set rates for home insurance.

More than 80 percent of all adult Americans — close to 189 million people — have a current credit report on file at one of the three major credit bureaus, the CFPB found.

Those who don’t have credit reports tend to be, above all, low income. About 30 percent of those with no credit reports live in low-income neighborhoods, the bureau found, compared to 4 percent of residents who live in high-income neighborhoods. About 15 percent of those in low-income neighborhoods have credit reports, but no scores.

Those with no or scant credit histories also are more likely to be black or Hispanic. Roughly 15 percent of black or Hispanic consumers have no credit reports, compared with about 9 percent of whites or Asians. And 12 percent to 13 percent of blacks and Hispanics have reports that either have so little activity — or so little recent activity — that they can’t be scored.

“What may be most concerning is that our analysis suggests that these differences across racial and ethnic groups materialize early in the adult lives of these consumers and persist thereafter. One explanation could be that these consumers face reduced access to credit that continues to hamper their opportunities for growth throughout their lives,” Cordray said.

Credit scorers and policymakers have been aware of the credit gulf, but they aren’t as sure how to bridge it. Scores give lenders a way to predict how likely they are to be repaid if they lend to a particular individual, based on his or her recent use of credit.

Lenders, who have to show regulators they aren’t taking undue lending risks, are hesitant to lend to people who don’t have a recent history of making reliable payments on credit cards or loans. But they also know there’s an untapped market here.

Both VantageScore and FICO have experimented with creating alternative scoring formulas based on how reliably consumers pay non-credit bills such as utility bills.