Credit Invisible

A credit invisible consumer is one who has no credit record at any of the three nationwide credit reporting agencies. The phrase is the Consumer Financial Protection Bureau's, coined in its May 2015 study Data Point: Credit Invisibles, which sets out the boundary in its own words: "In broad terms, consumers with limited credit histories can be placed into two groups. The first group is comprised of consumers without NCRA credit records. We refer to this group as 'credit invisibles.'"

The second group in that sentence is the one people conflate with the first, and the Bureau is careful about it in a way most writing is not. Those consumers do have records, and the question is whether a model can produce a score from one. The Bureau describes such records as "considered 'unscorable'" and then declines the word: "We refer to these records as 'unscored' rather than 'unscorable' to reflect the fact that other credit scoring models might generate scores for these records." That distinction belongs to the thin credit file page, which covers the scoreability gate itself.

So the line is a hard one. No record is credit invisible. A record that no model will score today is something else, and the difference is not a matter of degree.

The interesting question is not who is credit invisible but how people stop being it, and there is federal research on exactly that. The Bureau's June 2017 follow-up, Data Point: Becoming Credit Visible, tracked when and how consumers acquired a first credit record, using end-of-year archives of its Consumer Credit Panel from 2006 to 2016. Its findings do not line up with the standard advice.

Almost all of it happens young. Of the transitions out of credit invisibility the Bureau observed, "almost 80 percent occur before age 25." It also found that "Consumers in low- and moderate-income neighborhoods who make this transition do so at older ages than consumers in middle- or upper-income neighborhoods." So the population still credit invisible at 30 or 40 is a different population from the one the ordinary advice addresses, and it is disproportionately from lower-income neighborhoods.

Credit cards create the record, not credit-building products. In the Bureau's table of entry products across all age groups, credit cards account for 37.6 percent of first records. Student loans are next at 15.8 percent overall, though the Bureau notes this "is entirely driven by the transitions of consumers younger than 25." Retail accounts follow at 14.1 percent, third-party collections at 12.0 percent, auto loans at 8.9 percent.

The counterintuitive figure worth carrying, because it inverts a standard recommendation. Of the credit cards that served as entry products, "only 5.6 percent, or 2.1 percent of all consumers in our sample, used a secured credit card as their entry product." For consumers younger than 25, secured cards were the entry product for "less than 1 percent." The product most often recommended to someone with no credit history is one of the rarest routes anybody actually takes. That is a statement about prevalence, not about merit: the secured card page argues the product's case, and nothing here contradicts it. But a recommendation that describes the modal path should describe the modal path.

A quarter of people start on somebody else's account. The Bureau found that "About 15 percent of consumers opened their earliest reported credit account with a co-borrower," and that the records of "an additional 9.6 percent of consumers were created when the consumer became an authorized user on someone else's credit account," concluding that "about 1-in-4 consumers first acquire their credit history from an account for which others were also responsible." And it adds the finding that matters most: "The use of co-borrowers and authorized user account status is notably less common in lower-income neighborhoods." The route out of credit invisibility that a quarter of people take is one that depends on knowing somebody with credit, which is not evenly distributed.

A first credit record is not necessarily a good one. The Bureau found that "Consumers in lower-income neighborhoods are more likely than consumers in higher-income neighborhoods to acquire a credit record from non-loan items, such as third-party collection accounts or public records." Twelve percent of first records in the sample came from collections. For those consumers the transition out of credit invisibility is not an improvement in position; it is the beginning of a record that opens with a derogatory entry.

Two limits on all of the above, which the Bureau states itself. The transition study "uses a fairly narrow definition of credit invisibility that includes only consumers who lack a credit record," so consumers with unscored records are excluded from it entirely. And it "focuses exclusively on how consumers acquire a credit record without regard to whether it suggests they are a 'good' or 'bad' credit risk."

Nothing creates a credit record until a furnisher sends a nationwide credit reporting agency information about an account in your name. Until that happens there is no file to request, no score to produce, and no history to age. The transition is a single event: a first furnished account.

A worked example of the Bureau's own arithmetic, so the headline figures can be checked against each other. In Becoming Credit Visible, credit cards were the entry product for 37.6 percent of newly credit-visible consumers, and 5.6 percent of those cards were secured cards. Multiply the two: 0.376 × 0.056 = 0.021, which is the 2.1 percent of all consumers in the sample the Bureau reports for secured cards as an entry product. The two figures are the same fact stated at two different denominators, which is worth noticing, because a 5.6 percent share of card entries and a 2.1 percent share of all entries sound like different claims and are not.

The co-borrower arithmetic works the same way and is simpler: 15 percent opened their earliest account with a co-borrower and a further 9.6 percent became visible as an authorized user, so 15 + 9.6 = 24.6 percent, which is the Bureau's "about 1-in-4."

What follows from both figures is the practical shape of the problem. The common routes out are an ordinary unsecured card, a student loan for those young enough, or an account somebody else is also responsible for. The routes most often recommended to an adult with no history are real, and they are the minority path.

Pros

• It is a precisely bounded category with a federal definition, which makes it measurable and therefore arguable about in policy terms.
• Distinguishing it from a small record is useful: they are different problems with different fixes and different timelines.
• The Bureau's research gives a rare, checkable picture of how the transition actually happens rather than how it is supposed to.
• The condition is not permanent, and one furnished account ends it.

Cons

• The phrase describes an absence, so nothing about a person's finances can be inferred from it. A credit invisible consumer may have substantial savings and no debt.
• The most common routes out depend on age or on knowing somebody with credit, and the Bureau found the second is less common in lower-income neighborhoods, so the paths are unevenly available.
• For some consumers the first record is a collection account or a public record, which means becoming visible and starting badly at the same time.
• The figures here are dated. The transition study runs to 2016 and the population estimate is as of 2010, and nothing more recent of comparable scope has replaced them.
• Ending credit invisibility does not by itself produce a score, because a record still has to satisfy a model's minimum criteria.