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U.S. Credit Invisibles Predominate in Lower-Income Areas

Nearly 30 million adults in the U.S., or about 12% are credit invisible with no credit history at one of the three nationwide credit reporting companies. Consumers in lower-income areas are more likely than those in higher-income areas to become credit visible due to negative records such as a debt in collection. 

A Consumer Financial Protection Bureau (CFPB) study reveals consumers in higher-income areas are more likely than those in lower-income areas to establish credit history by using a credit card or relying on someone else.  The study also found that the percentage of consumers transitioning to credit visibility due to student loans more than doubled in the last 10 years.

Without a sufficient credit history, consumers face barriers to accessing credit or higher costs. This issue disproportionately impacts consumers who are African American or Hispanic, and people who live in low-income neighborhoods. It can also impact some recent immigrants, young people just getting started, and people who are recently widowed or divorced.

The study also found that almost 80% of transitions occur before age 25 and that credit cards are the most common way consumers establish credit. The study also found that the way consumers establish credit history – taking out a credit card, relying on a co-borrower, or having negative records – can differ greatly based on economic background. Specific findings in today’s report include:

▪ Consumers in lower-income areas are 240% more likely to become credit visible due to negative records: Overall, roughly 15% of consumers establish a credit history by non-loans such as a debt in collection or a public record. Almost 90% of these non-loan experiences convey uniformly negative information about the consumer’s creditworthiness. Consumers in lower-income neighborhoods are 240% more likely than those in higher-income areas to become credit visible due to negative records. The study found that 27.1% of consumers in lower-income neighborhoods establish credit history with non-loan records versus only 7.9% of consumers in higher-income neighborhoods.

▪ Consumers in higher-income areas are 30% more likely to become credit visible by using a credit card: The study found that credit cards are the most common way that consumers establish their credit, with roughly 38% of consumers becoming credit visible with a credit card. However, consumers in higher-income neighborhoods are 30% more likely than those in lower-income areas to use a credit card to become credit visible. The study found that 44% of consumers in higher-income areas establish a credit history with a credit card versus 34% of consumers in lower-income areas.

▪ Consumers in higher-income areas are 100% more likely to become credit visible by relying on someone else: Overall, roughly 15% of consumers established a credit history by relying on co-borrowers and another 9.6% of consumers did so when they became an authorized user on someone else’s credit account. Consumers in higher-income areas are 100% more likely than those in lower-income areas to rely on someone else to establish their credit. The study found that 30% of consumers in higher-income areas establish credit through a co-borrower or by becoming an authorized user versus only 14.9% of consumers in lower-income areas.

▪ Percentage of consumers who became credit visible due to student loans more than doubled in last 10 years: The number of credit records established through student loans has grown rapidly in the last 10 years among consumers under 25. The portion of consumers who used a student loan to establish credit visibility more than doubled from around 10% in 2006 to more than 26% in 2016.

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