Why Am I Invisible to Mainstream Lenders?: Understanding Credit Access

Why can't I get a credit card?

If you can't get approved for a mainstream car loan car loan or credit card, it is likely due to your credit history, or lack thereof.

Certified Financial Planner Patricia Russell from FinanceMarvel (now knows as Credit Repair Expert) explains: "There are many reasons a company may refuse to approve you for a loan or a credit card. A company's decision is based on two main factors, and that is your income and your credit history."

Do you have bad credit?

"Having a credit score at or below 500 makes qualifying for loans incredibly difficult," adds Jared Weitz, CEO and Founder of United Capital Source Inc. Russell says, applicants with a bad credit score are typically turned down. When they are approved, it will come with a high interest rate. Weitz explains, "It is at this score range where payday loans become an only option."

But what if you don't have a credit score?

You aren't alone.

Millions of Americans are in the same boat. Check out these crazy stats:

Forty percent of Americans can't cover an unexpected $400 expense. And a 2018 report revealed that 1 in 3 adults applied for credit, 23 percent were denied at least once and 31 percent were denied or offered less than they wanted.

Getting denied can be a confluence of factors, but credit is a very likely common factor, whether that means bad credit, no credit, or unscorable credit.

Are you invisible?

"When you go to apply for a cell phone or to rent an apartment or get a loan, companies pull up your credit history," explains Russell. "For most Americans, this will be full of credit cards and loans and other activity in their financial lives.

Being credit invisible means that there is no history available. The credit invisible do not have good credit or bad credit. This means that companies have nothing to base their decisions on. They have no indicator whether you would pay your bills on time and don't have a way to decide if they should do business with you and what they should offer you."

"Credit invisibility is a major obstacle for many of the nation's citizens," says credit industry analyst Sean Messier with Credit Card Insider.

He's got a point: According to the U.S. Consumer Financial Protection Bureau (CFPB), 11 percent or 26 million adult Americans are credit invisible.

Russell explains: "The credit invisible are seen as wild cards and too risky to work with, so are also commonly turned down for mainstream credit cards and loans.

When an applicant has been turned down by mainstream credit sources, the next best option when money is needed is to find a payday loan to help them get by."

Are you unscorable?

On top of that, the same CFPB report says that 8 percent of adults or 19 million consumers have an unscored credit record. "Being credit unscorable indicates you have very limited, or thin credit history," explains Weitz. Thin credit history matters. If you don't have six months of credit history, you can't get a FICO score. "[T]his is common," says Weitz, "for young graduates, immigrants or cash-only consumers that have not been making card purchases or building credit."

Why does it matter?

"When I think about credit invisibility," says Zara Mohidin, Head of Strategy and Business Development at Fig Loans, "I think about a term coined by our partners at the United Way, called ALICE. There's a lot of jargon out there about "underserved" or "underbanked" Americans but what I love about ALICE is that it actually describes the person who is credit invisible. ALICE stands for Asset Limited Income Constrained Employed and it is a new way of defining and understanding the struggles of the households that earn above the Federal Poverty Level but don't have access to mainstream sources of financing. ALICE is your child's teacher, your parent's caretaker, your office clerk, and your waitress. Despite the critical nature of their jobs in our society, ALICE is struggling to make ends meet and a big part of that has to do with credit invisibility. With a lack of access to affordable credit, one unexpected car accident or medical bill can push ALICE over the edge." 

Additionally, Weitz explains, "Without history, loan offices or credit agencies have nothing to base your financial history from — and this is viewed as a risk for them."

What does this mean for you? Ivan Chong, founder of Lazy Finances understands the predicament. He puts it this way, "Unfortunately, it's a catch-22 since having no credit makes it difficult to get a credit card to build your credit." If you lack a credit score, Chong says that security deposits may be required for a cell phone or utility services and car insurance rates can be affected.

On top of that, if an unexpected medical bill or emergency comes along, you will have very few options for borrowing money.

What do you do about it?

"Similar to the general idea, ‘it takes money to make money,' same goes with good credit," says Weitz. "If you have low or no credit, gaining access to build positive credit is difficult. Low-income people have limited cash flow in and out which means gaining credit takes longer. This can be fixed by taking steps to build a credit score, such as recording on-time rent payments or taking out a credit-builder loan through a community credit union."

Along those lines, the Consumer Financial Protection Bureau suggests three ways to establish credit from scratch: an in-store/retail credit card, a secured credit card, and a credit builder loan. Let's take a minute to learn more about these three options.

1. Retail credit cards

"Retail credit cards are generally issued by a notable financial institution and co-branded with a certain merchant," explains Messier. These are the in-store cards that are often offered to in-store and online shoppers at department, hardware, or clothing stores. There are many variations, but in general, in-store credit cards have the following characteristics:

• Easier approval for lower credit scores
• Only able to use them at the retailer in question
• Higher interest
• Lower credit limit
• Often come with rewards for signing up and purchases

Russell gives us a rundown:

"Retail credit cards are easier for people with a bad credit score to be approved for. They typically have subprime terms written into their normal contracts, so it is normal for them to accept people with lower credit scores.

This can give someone with a bad credit score, or someone who is credit invisible, the opportunity to build up credit. These cards are suggested for that as long as you know you need to pay the card off in full every month in order to build a positive history of on time payments, and so you can avoid paying the high interest rates that come with these types of cards.

To do this, you'll want to apply for a card at a place you shop often since these cards can be limited in where you can use them. If you are a frequent shopper at Amazon or Target, they have popular retail card offers that are known to report to the credit agencies."

2.  Secured credit cards

"Instead of using a retail credit card to establish credit, consider a secured credit card," suggests Messier. Secured credit cards are issued by all of the big credit card companies, and are often co-branded with a specific bank or credit union.

Examples include Discover it Secured, Citi Secured Mastercard, and OpenSky Secured Visa from Capital Bank N.A. Common secured credit card characteristics include the following:

• Easier approval than unsecured cards
• Requires you to pay a security deposit
• The credit limit is a percentage of your deposit (50%-120%)

"Use the card wisely by making on-time payments," says Weitz. He adds, "eventually, you will qualify for an unsecured card and receive the deposit back." With an unsecured card, you can officially be ushered into mainstream credit and loan options.

3.  Credit builder loans

"A "credit-builder loan" is basically what it sounds like: a loan designed solely for the purpose of helping you build good credit," writes attorney Amy Loftsgordon on NOLO. These are often available through online lenders like Self Lender, community credit unions and banks, as well as Community Development Financial Institutions (CDFIs), like Fig Loans. As with the other credit building methods, credit building loans can differ, but they generally include the following characteristics:

• An initial payment or account origination fee applies
• Make monthly payments into a savings account
• Many offer a 20+ day grace period (to help avoid reporting disparaging info to the CRAs)
• Amounts are generally small $500-$3,000 and last 12-24 months
• Once you pay off the loan, you can access the account

It is important to note that once you take the first few steps towards establishing your own credit, it can take six months or more to get a credit score.