Credit Scoreless? How Lenders Target Those with No Credit History

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Unscrupulous lenders prey on those with bad or no credit scores, like the 20% Americans with unscorable or invisible credit.

Your credit score is like the mean girl in junior high school. She's the gatekeeper, the one who decides if you're "in" or not. And let's face it, unless the mean girl is very nice to us, none of us really like her.

That sort of sums up how many Americans feel about credit scores. They are the gatekeeper for everything we do -- from renting an apartment to getting a job or taking out a loan. If the gatekeeper thinks we're fabulous, we get offered low interest rates on personal loans, credit cards with great rates and great perks, and never need to fear credit checks. If the gatekeeper only deems us so-so, we might get some of those benefits, but at much higher rates.

But what if the gatekeeper doesn't even know we exist? What if we pass her in the hall every single day, sit next to her in science class, and she could not manage to identify us in a lineup?

That's what it's like for an estimated 20% of the U.S. population whose credit cannot be scored by the most common credit scoring models. According to the Consumer Financial Protection Bureau (CFPB), the credit records of 8.3% of Americans are considered unscorable and a further 11% (26 million people) are categorized as credit invisible.

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Breaking it down

Understanding how so many people are left in credit purgatory has a lot to do with those categories mentioned in the CFPB report. 

Unscorable

Insufficient information: Simply put, these are credit reports that don't have enough detail to be used as an indicator of how well people might repay loans -- either because there are too few accounts or the payment history is not long enough. This is not an uncommon spot for young adults to find themselves in prior to borrowing money for school, renting an apartment, or getting their first credit card. 

Stale: Those who have credit but have not utilized it for a long time fall into this category. You can avoid a stale credit report by making small, regular charges to a credit card and paying the balance off immediately. 

Credit invisible

Being credit invisible means that a person does not have a credit history at all, something that disproportionately affects people in low-income neighborhoods. CFPB's research found that 30% of people in these areas are credit invisible and 15% have unscorable credit records.

Who benefits? 

Unsurprisingly, it is predatory lenders who benefit most from the fact that 20% of Americans have unscorable or invisible credit. These are opportunists who know that a lack of a credit is enough to lock borrowers out of traditional, low-cost loans and are more than happy to exploit the situation. 

Predatory lenders will tell you that the reason they charge the kind of interest rates that would make a loan shark blush is that so many of their customers fail to repay their loans. If that were true, none of these lenders would still be in business. 

Here are three examples of the ways these lenders squeeze every last penny from those without credit: 

Payday lenders: The payday loan industry is the poster child for predatory loans. A report from InCharge Debt Solutions shows that 12 million consumers take out payday loans each year, a practice that costs them $9 billion in fees. And 70% of payday borrowers spend their cash advance on bills and other necessary monthly expenses. The problem is clear: If they borrow money at a high interest rate to pay for necessities, what are they going to do next month? The average interest rate on a payday loan that is paid back within two weeks is a whopping 391%.

Buy Here, Pay Here: These car dealerships have long been the go-to for buyers who have been turned down for an auto loan due to credit issues. Buyers find a car on the lot and the dealer sets up in-house financing. Here are a few of the associated risks:

• Buyers pay a much higher interest rate than they would if they'd been able to borrow from a bank or credit union.
• Unlike traditional lenders, Buy Here, Pay Here dealerships often charge (and lend) more than a car is worth.
• Not all Buy Here, Pay Here dealerships report positive payments to the credit bureaus, meaning buyers may still be without scorable credit after paying off the car in full.
  
  

Rent-To-Own: No credit? No problem at rent-to-own businesses across the country. These multi-billion dollar businesses allow those with no credit to "rent" items such as appliances, computers, jewelry, furniture, with weekly and/or monthly payments.

Consumer protection group, PIRG describes the typical transaction: Someone comes into the store looking for a rent-to-own television. They choose a model with a market value of $220 and it requires 78 weekly $10 payments, for a total of $780. If that customer makes all 78 payments, he or she has just paid an extra $560. If the customer had been able to use a credit card to buy that same TV -- even at a high APR of 25% -- they would be able to pay it off at $10 a month in 30 months and pay about $80 in interest.

If you're one of the 20% of Americans with unscorable or invisible credit, there are a number of steps you can take to build up your credit. Try applying for a secured credit card. Or, you could apply for a credit-builder loan which, as the name suggests, is designed to build your credit.

If you have a credit card or another form of loan, making regular, on-time payments will help your payment history, one important factor in your credit score. The other is credit utilization, which is the balance you carry in relation to the total credit you have available. While you should try to keep it below 30%, if you don't spend any money on your credit card at all, your utilization ratio will be zero -- which doesn't give lenders any information about how you manage debt.

The important thing is to take concrete actions to build a credit file and then build up your score to something you can be proud of. That way you should be able to avoid predatory lenders altogether.

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