What does it mean to be credit invisible?

Like it or not, we live in a world where credit is king. But according to research by Experian, an estimated 28 million Americans are considered “credit invisible.” The term — which sounds like something straight out of a DC Comic — refers to people who have no credit score.

This can happen for a variety of reasons, but it’s an issue that shouldn’t be taken lightly, as it can affect your ability to access many things, including an apartment lease, an affordable insurance policy, or even a cellphone plan.

In this piece, we’ll go over everything you need to know about credit invisibility, as well as how to fix it — so you can live your best financial life.

How do you become credit invisible?

A lot of people confuse being credit invisible with having a thin credit file. Rather, when you have a thin credit file, that’s called “credit unscorable.”

Being credit unscorable means that although you have some credit history in your file, it is so scarce that the credit bureaus (Experian, Equifax, and TransUnion) can’t properly assess how risky of a borrower you are, so they can’t rank you.

However, being credit invisible means that you have no credit history at all. So, if you were to apply for an auto loan, a mortgage, or an apartment lease, for example, the lender won’t find any results when they check for your credit report.

Now, you’re probably wondering how in this day and age it’s possible for someone to have no credit score, but it’s more common than you’d think. In fact, millions of Americans are considered credit invisible, according to the most recent data published by the Consumer Financial Protection Bureau (CFPB).

So, how can this happen?

Well, if you’ve been living a cash-only lifestyle, or if you’re too young to apply for credit on your own, you’re probably credit invisible.

Here’s why.

The way credit scoring models work is that you’re ranked (given a score) based on how well you’ve managed your credit accounts (student loans, auto loans, credit cards, etc.).

If you’ve never opened any credit accounts in your life, there’s basically nothing to be reported to the credit bureaus. And if nothing gets reported, the credit bureaus don’t see the need to open a credit file for you.

However, you could also become credit invisible if you’ve closed all of your credit accounts, and you haven’t had any new credit activity on your report for over six months, according to Experian.

How having no credit score can affect you

Having no credit score can affect you in more ways than you think.

You may have difficulty renting a house or an apartment

Besides checking your income and running a quick background check, most landlords also check your credit report. They do this to see how responsible you’ve been with paying your bills. If they can’t verify how risky of a tenant you’ll be, you may have trouble getting a lease.

You could end up paying more on insurance

Unless you live in California, Hawaii, or Massachusetts, where the practice is banned, most insurance companies will take into account your credit score to come up with your insurance rates. According to the Insurance Information Institute, insurance companies will give those with a low or poor credit score a higher rate, as they’re more prone to file claims than those with excellent credit scores.

You won’t be able to secure the best terms or interest rates

Besides limiting your access to many lending products, if you do get approved for a loan, you’ll most likely pay a hefty interest rate. Why? Because lenders don’t have any proof that demonstrates you’re a responsible borrower. This, in turn, will not only cost you more money down the line but could also make you delay important milestones, such as buying a house.

5 ways to build your credit from the ground up

As you can see, having no credit score can affect your life in many ways. Luckily, there are easy ways to fix this.

Get credit for things you already pay for

One of the easiest and most overlooked ways to build credit is to sign up for a service such as Experian Boost™ or UltraFico, which looks at accounts or bills that typically don’t get reported to the credit bureaus, to give you a score.

These include payments made to subscription services, your cellphone bill, and rent. Besides that, in the case of UltraFico, you can also link your financial accounts, including your checking, savings, and money market accounts, and use those as leverage for your score.

The best part about these services is that they’re available for free, and they only report positive payment history, so they won’t hurt your credit score in any way.

Become an authorized user on a family member’s or friend’s credit card

Another quick way to build credit is by asking your parents or a friend if they can make you an authorized user on their credit card.

When you become an authorized user on someone else’s credit card, you get access to a credit card stemming from that person’s account, which you can use as if it were your own. However, when asking someone to add you as an authorized user, you need to be mindful of their financial habits.

If they’re responsible with their account and pay bills on time, then this will help you boost your score almost instantly. But if they have a history of late or missed payments, your credit score could suffer, too.

Here’s more on how being an authorized user can help build credit.

Apply for a secured credit card

A secured credit card works just like a regular credit card in the sense that you can use it for purchases, to book trips, or to pay for subscription services. The difference, however, is that you have to pay a security deposit to use it, and that amount becomes your credit limit.

Besides that, secured credit cards, like the OpenSky® Secured Visa® Credit Card, won’t pull your credit report as part of the application. So you can apply even if you have no credit score at all, and will get your payments reported to all three credit bureaus.

Here’s a list of our favorite secured cards.

Sign up for a store credit card

Many experts advise against this one because of the high interest rates these cards tend to have. To give you an idea, store credit cards tend to have interest rates above 24%, while a regular credit card has an average interest rate of 19.68%, according to LendingTree.

However, because store credit cards are designed to purchase merchandise at that specific retailer, they are easier to qualify for than your average unsecured credit card, and your credit activity and payments get reported the same way.

Apply for a credit-builder loan

There are different types of credit-builder loans, however, most of them work like this:

1. You apply for the loan either online, at a bank, or at your local credit union. These loans tend to be small: $500 to $1,000.
2. Once you apply for the loan, the lender puts the loan amount into an interest-bearing savings account or a CD.
3. Then, you start making payments for a year or two — although there are longer terms.
4. When you finish paying the loan, the lender then unlocks the funds and disburses them to you, minus any interest and fees.

Basically, you get the loan after you pay for it, so it’s a nice way to build credit and stay out of debt at the same time.

Related: Is a credit builder loan right for you?

Summary

Being credit invisible can limit you in many ways. But thankfully, you can fix this easily. You just need to evaluate your options carefully and pick the one that best fits your lifestyle and financial needs.

Featured image: StunningArt/Shutterstock.com

Read more:

• What credit score do you need to get approved for a credit card?
• What’s your credit utilization ratio and how does it affect your credit score?