Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

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July

Is your Credit Invisible?

Karen Gibbs

Hi Karen, what does it mean to be “credit invisible”?

 - Butch from Baltimore County

 

Credit ReportButch, the term “credit invisible” refers to people with limited or no credit history with the three major national credit reporting agencies.

 

According to the Consumer Finance Protection Bureau, or CFPB, 26 million Americans, or 11% of the population, lack a credit history.  Additionally, another 19 million, or 8% of adults, have a limited credit history that’s not enough to generate a credit score.

 

The impact of credit invisibility is that those adults are not included in the economic mainstream.  As the CFPB found, the lack of a credit history and score can stop them from getting an education, starting a business or providing a roof over their head.

 

The CFPB found that credit invisibility affects mostly young adults, those with low-incomes, minorities and new immigrants.  80% of young adults between 18-19 years old are credit invisible.  The number declines to 40% for those 20-24 and falls to 10% for those 60-64.  The percentage rises after 65, but mostly due to lack of recent credit information; the mortgage has been paid off and less reliance on credit cards.

 

As credit history is established over a lifetime, it’s important to establish good credit habits early.  Poor credit or lack of a credit history leaves you at the mercy of legal, predatory lenders who charge exorbitant interest rates and fees that can quickly spiral out of control.

 

How do you establish a credit history?  It may surprise you to know that you may already have a credit report somewhere, but you won’t know until you contact one of the three credit reporting agencies.  You can get one free report from each agency once a year.  Stagger the requests every four months and you have your own credit monitoring system in place.

 

Do you have a relationship with a financial institution such as a bank or credit union?   Apply for a credit card with them.  The credit amount may be low at the start, but by paying your bill on time and in full every month, the financial institution may offer you a larger line of credit and/or a lower interest rate.

 

Another method of establishing credit is to open a retail account at a store or a gas station.  Again, pay off the entire amount, on time, and you’re on the road to a good credit score/report/history.

 

You can also establish a credit history by taking advantage of “same as cash” offers.  I just replaced my garage door with a one-year, same as cash offer.  No interest was charged as long as I paid the required amount on time.

 

One other way to establish credit without incurring a lot of interest expense is to buy something on credit, make the first payment, and then pay off the remaining balance with the next payment.  You will have paid a little more when interest is taken into account, but the goal of establishing credit will have been achieved.  You will no longer be credit invisible.

 

Best of luck to you, Butch! 

 

-Karen

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