If you're a millennial, an immigrant or a member of a low-income household, chances are you'll have a harder time obtaining many of the financial opportunities enjoyed by other Americans. This is because you're more likely to be credit invisible, a term describing a situation where you have few or nonexistent records with the three major credit reporting bureaus - Equifax, Experian and TransUnion.
Why are you more likely to be credit invisible? In short, the systems used to score your credit have remained relatively unchanged since they were first introduced in the 1980s. However, a combination of factors - including the Great Recession, a widening income gap and increasing student loan debt - shifted the shopping habits of a huge number of consumers. Fewer millennials, immigrants and low-income individuals are making the traditional major purchases that build credit history. They might pay their bills on time, but these payments don't include anything large like a mortgage or a car note.
The Consumer Financial Protection Bureau estimated 26 million Americans are credit invisible. The Center for Financial Services Innovation put this number higher, estimating 70 million. Both organizations agree, however, that credit visibility can greatly improve your life, opening up opportunities like car and home ownership. As the CFSI pointed out, owning a home is how most Americans accumulate and save wealth.
Luckily, credit visibility isn't out of reach. Most make the transition at a young age - according to a CFPB report, 80 percent occur before age 25 - but the switch is also available to people at an older age. If you need help providing visible credit, below are the four most common ways of doing so:
1. Use alternative credit scores
"An alternative credit score takes into account your rent, electricity, cell phone, internet and other bills."
Alternative scoring systems take data not collected by the major credit bureaus to evaluate your creditworthiness. If you make your rent, utilities or similar payments on time, chances are you're a responsible consumer. Unfortunately, because this information is ignored in traditional credit reporting, lenders don't see you as a good option. An alternative credit score, which takes into account your rent, electricity, cell phone, internet and other bills, can help you change their mind. Such reports are useful for goals like renting an apartment, screening potential residents and retail financing. In fact, the CFSI estimated alternative products can score anywhere from 70 to 100 percent of consumers with no traditional credit, depending on the criteria used.
2. Open a credit card
Per the CFPB's report, credit cards are the most common way young consumers become credit visible. The agency's numbers show that 35.6 percent of consumers under 25 create credit records this way. That increases to 47 percent for people who are 25 to 29.
Of course, that doesn't mean you can abuse your credit card, charging a lot of purchases and never paying them off. This method only works if you are a responsible consumer and make your payments on time.
3. Take out student loans
This is the second most common way people become credit visible, but as you might expect, it mostly affects the young. Nearly 20 percent of people under 25 achieve visibility this way, but that number drops to 2.5 percent for consumers 25 to 29. Using loans to go back to school isn't a good credit-building strategy if the education will do nothing for you, but if you were already planning on doing so, it's good to know you can become credit visible in the process.
4. Apply for joint credit or become an authorized user
If you need to make a major purchase, having a cosigner increases your chances of securing a loan. It's also an opportunity for you to build credit as an individual. Becoming an authorized user on another person's account has a similar effect.
If you're considered credit invisible, you don't have to lose hope of owning a home or car. With alternative credit scores and other methods, visibility is just a few consistent payments away.