In Karl Taro Greenfeld’s novel, The Subprimes, you are your credit score. A low score is a Scarlett letter of sorts that renders one virtually unemployable and shuts them out of the mainstream. It is a brilliant satire set in the future—and the message should be taken seriously, especially among financial educators.
Good credit is a key aspect of modern life, even if you never intend to borrow. Yet 26 million American adults are “credit invisible,” according to a report from the Consumer Financial Protection Bureau. That means they do not show up on the records of any of the major credit reporting companies.
This represents 11% of the adult population, most of them young adults just getting started in life or low-income households living in a personal cash economy and unable to establish a credit history.
We are a long way from having to show your credit scorecard to a policeman who pulls you over on the highway, as is the case in Subprimes. But young people hoping to buy or lease a car, or move into their own apartment had better have some kind of credit history. Without a track record, they may even get turned down for employment.
Most people mange to cross the threshold. Few have any credit history before age 18. Yet by age 29, nearly 90% of Americans have become credit visible, the CFPB found. How does this happen?
Increasingly, student loans get the job done. Assuming you pay on time, this is one side benefit of debts that plague many Americans for years. Just 10 years ago, only 10% of consumers that established credit before age 25 did so via student loans. Today, that figure is 26%.
Credit cards provide the most common path to credit visibility: 33% of those under age 25 put themselves on the map this way; 38% of all consumers established credit via plastic, the CFPB found. This is a far more common experience in middle- and high-income households.
Another way people establish a credit history is by piggybacking on someone else’s account. A quarter of consumers become credit visible by co-signing or becoming an authorized user on a family member’s credit card. Again, this is far more common in more affluent households.
The CFPB also found that 27% of consumers in low-income neighborhoods first establish a credit record, not through their own efforts, but instead through negative events like debt collections that show up in public records. This rate is 240% higher for them than it is for higher-income households. And this is not good. Almost all of such credit records are damaging.
Policymakers are exploring ways to bring low-income households into the credit mainstream, by examining things like rent, and utility and cell phone bills. But for now those generally do not count. Financial educators might help students understand the importance of becoming credit visible as early as possible, and even point up this side benefit of student loans—lest they become something like one of Greenfeld’s subprimes and struggle more than they should to launch.