A Roadmap to Homeownership for Consumers with Thin Credit Records

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Homeownership is an important life goal and milestone for many Americans, offering significant benefits beyond wealth creation and financial security. But today in the United States, 26 million adults are effectively blocked from homeownership because they are “credit invisible,” meaning they have no record of borrowing or repayment of money through loans, credit cards or other forms of consumer credit. Without a credit history or credit score, these consumers lack key tools that mortgage lenders use to help people access homeownership.

There are good reasons some people are invisible to credit. According to the Consumer Financial Protection Bureau, more than 10 million of these consumers are under the age of 25 and likely earning income for the first time; they are just starting their adult lives, so it stands to reason that they don’t have the long financial history that comes with time.

On the other end of the spectrum, spending tends to decline after a consumer retires, and many older Americans who might have had good credit in the past may see their credit records shrink. In most cases this is not a problem, as they are not looking to buy a new home or open other types of credit accounts.

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Another group with little or no credit history are immigrants who may have had credit accounts in their former country, but that prior credit history does not transfer to the US system.

Whatever the reason, consumers with limited or no credit histories will have a harder time getting loans, and when they do, they’ll likely pay more interest and fees.

While your credit history is certainly important, lenders also consider whether an applicant has enough income to repay, the total amount of consumer debt, and whether they have enough cash on hand for a down payment. Establishing a solid credit report is therefore not a magic bullet, but it can really help. Here are five ways consumers can become credit visible:

First, become an authorized user on a friend or family member’s credit card. As an authorized user, you get your own card and share the primary account holder’s credit limit and payment history. The important thing is to make sure that you and the primary account holder make payments on time and don’t go over balances. With responsible handling, this positive payment record will show up on your credit reports and can improve your credit score. (And make sure everyone understands that this is a cut account, which means that all users are responsible for the charge even if the other person made the charge).

A second option is to leverage your personal recurring payment data. Today, consumers can report their rent, utility, cell phone and streaming service payments to the three national credit bureaus (Equifax, Experian and TransUnion) and see the positive impacts on their credit scores. Services like Experian Boost help you do this automatically and for all payment types; rent declaration services are also available.

Third, apply for a secured credit card. Many banks offer this option, which allows consumers to pay a cash deposit as security which usually becomes their credit limit. From there, consumers can charge a la carte purchases and make regular, on-time monthly payments and begin to build a positive payment history that is reported to national credit bureaus.

Another option is to apply for a credit builder loan. Many credit unions offer these types of loans, and they can be great both for building up a consumer’s credit report or for repairing damaged credit. Consumers borrow a small amount which the lender then places in an account they cannot access. Once the consumer has repaid the loan through a predetermined set of payments, that loan is then released to the consumer. However, before applying for one of these loans, make sure your lender reports the payments to the credit bureaus.

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Finally, immigrants who are faced with building a credit score from scratch upon arrival in the United States have a fifth option. Applying for a credit card through Nova Credit converts a consumer’s international credit history into a US credit score. Although this service does not yet work for immigrants from all countries, it can help build a credit history in the United States.

It’s important to note that once you’ve established a credit history, calculating a credit score can take up to six months of payment history. So adjust your home buying and mortgage application schedule accordingly.

Apart from these tangible steps, unseen credit consumers should also consider working with third-party credit counseling services like Credit Builders Alliance. These advisors can provide financial advice and help consumers build their credit step by step.

Consumers considering buying a home should check their credit report regularly well before applying for a loan. Consumers can do this for free at annualcreditreport.com (as often as weekly until the end of 2022). Be sure to use the correct link – this is the official site for free reports that federal law requires credit bureaus to make available.

Building a healthy credit report can take time. But there are tools available to get you on the right track.

Francis Creighton is the President and CEO of the Consumer Data Industry Association, based in Washington, D.C.

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