Home > Credit 101 > Who Doesn’t Have A Credit Score? (Hint: It Could Be You)

Comments 0 Comments

For numerous reasons unrelated to their ability to pay back loans, millions of creditworthy borrowers find themselves unscoreable under traditional credit scoring models. Yet at the same time, lenders are seeking new pools of creditworthy borrowers.

With such a win-win proposition, it’s amazing we are still discussing how to solve this challenge.

A basic requirement for a credit score is some history of credit usage. Some credit score models require very recent credit usage, such as activity on at least one account at some point in the last six months. In other words, whether you have one credit account (e.g., a credit card) or many, if you don’t use any of them for six months, you may be invisible to many lenders because the credit score model they are using may not recognize your credit history.

By the same token, if you are new to the credit market (e.g., a recent college graduate and/or someone who acquired a secured credit card, which is a credit card that includes a deposit, without the use of a score) you cannot receive a credit score using some traditional models until after six months of reported payment history.

Having been an executive at large lending institutions for most of my career, I witnessed this scenario first-hand. A great many borrowers, whom I knew were good credit risks, were either manually underwritten, which costs more for the lender to analyze than by using an automated system, or sometimes they were deemed a higher credit risk than they actually were.

Scoring more people is all fine and well, but ultimately, a lender must make the decision to grant these individuals credit or decline them. So who are these people that make up what those of us in the industry commonly refer to as “the unscoreables?” Conventional thinking suggests they are young students, recent immigrants, and others new to the credit market.

Except that is only partially true.

Actually, as the graphic below suggests, the average unscoreable consumer has a good job and a better-than-adequate credit profile. In other words, the typical unscoreable consumer is, well…typical.

Credit Characteristics of the Unscoreable

One of the unfortunate outcrops of the unscoreable conundrum has been that consumers may be deemed high risk, or “subprime,” by traditional credit scoring criteria and/or lenders simply because they do not have significant credit histories. However, by using a different scoring methodology, we found many are actually quite creditworthy and identified as prime or near-prime consumers, which means they are less likely to become seriously delinquent on a loan.

Based on a VantageScore Solutions’ study, among infrequent users of credit, 15.5 percent were found to have either prime or super-prime risk profiles. And among new entrants to the credit scene, which include recently graduated students, immigrants or recently divorced consumers, 26.5 percent were found to have either prime or super-prime risk profiles.

When these consumers are not provided a credit score or mislabeled as being high-risk, it leaves them little alternative but to seek credit from lenders outside of the mainstream credit industry who may charge exorbitant interest rates.

Though VantageScore is indeed able to provide scores for the traditionally unscoreable, beyond our model, there are a number of other new solutions in the credit scoring market that tackle the unscoreable issue, but a great equalizer is rental payment history, which is now beginning to be reported by some landlords. Obviously, rent payments are a significant portion of a person’s total recurring monthly expenditures, as shown in the graphic below.

But unlike a mortgage payment, rent payment information isn’t widely reported to the credit reporting agenices when it could be a great tool for the unscoreables.

Specifically, according to Experian, 32 percent of renters are unscoreable without using their rental payment history. When the rent payment history is used to calculate a credit score, 87 percent can be provided a score.

Reporting rental payment history is unnecessarily controversial. Critics suggest that since lower income consumers traditionally rent, they are more likely to miss payments and have their credit history harmed than those with higher incomes. In fact, 45 percent of high-risk consumers increased their VantageScore credit score to 600 and above (note: the VantageScore model’s scale is 501 — 990) when rent data was used in calculating their credit scores.

Another important fact that is missed is that when ongoing rent payments are not reported, renters are not provided the positive impact of those payments. But when a renter becomes seriously delinquent on payments and their landlord hires a collection agent, the negative impact of a collection account being reported to the CRAs comes into play. It’s only fair that renters receive both the positive and negatives of their rent payment behavior.

If you do find yourself unscoreable, first, check to see if other credit scoring models provide you a score. Second, open a secured credit card. Be sure the card issuer reports payments to the three major CRAs. A benefit is that some of these cards convert to a regular credit card after a certain period of time.

Another option is to work with a lender that offers manual underwriting, or one with whom you already have an established relationship and knows your finances. Some of the major lenders have the ability to issue credit the old-fashioned way: by manually reviewing your credit files and other data to determine the specific terms if you qualify for a loan. Here again, be sure to work with a lender that is reporting payments so you can repopulate your credit files.

So if you find yourself to be among the millions that are invisible to some credit scoring models, you can take solace in that you are not alone, there are models out there that seek to recognize you, and there are steps you can take to rectify the situation.

Image: teclasorg, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team