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One of the most important aspect of your credit score is your FICO score. But there are a lot of folks who aren’t even on the FICO radar.
According to a Consumer Financial Protection Bureau (CFPB) report released last month, 11 percent of the adult population, or a whopping 26 million, were “credit invisible” This means they have no credit record or credit score. On top of this, 19 million (or nearly 20 percent) of consumers did not have enough of a credit history to get a score.
The problem is FICO doesn’t recognize various items such as rent to a landlord, mobile phone bills, or medical bills. But if you fail to make payments, negative information could make its way to your credit report, if for example your landlord sues you for payment, or your doctor or mobile phone company turn over your debt to a collection agency. So a person that has no credit who always pays her rent on time and has a good amount of money in the bank would have no credit score at all.
FICO scores are calculated by looking at payments for mortgages, auto loans, student loans, personal loans, and secured card or credit card. Banks report monthly to the credit bureau on whether you made your payment or not.
It’s not a good thing to be credit invisible. “Without a credit score, it will be nearly impossible to get a mortgage. In addition, obtaining affordable auto loans, credit cards and personal loans becomes nearly impossible… Without a credit score, the individual would have to turn to payday lenders or worse, which can easily charge interest rates above 100 percent,” reports Forbes.
Because of this dilemma with the FICO reporting, there are some companies attempting to start alternative credit scores.
“The easiest, first step would be to require mobile phone companies to report on-time payments to credit bureaus. They are already using credit reports to decide whether or not to turn on an account and offer monthly billing,” reports Forbes.
There are things you can do to get a credit score. Get secured credit card and use it every month but never use more than 20 percent of the credit limit available. Also always make your payment on time. It’ll take six months of on-time payments before you receive a score. You can use this method even after bankruptcy to rebuild your credit rating.
But FICO says its method of reporting is the way to go. Jim Wehmann of FICO told American Banker, “The FICO score can only use data that is readily available. If a consumer does not have an account or relationship that reports to the credit bureau, the score is unable to use that information.”
He added, “Over time, the data consistently demonstrates that at least six months of credit bureau data needs to be available in order to generate a stable, meaningful score. FICO could easily create a score for the millions of Americans who have less than six months of data. However, the score would not be meaningful.”
