When Kelly Meehan Brown arrived in New York from Ireland three months ago with a J-1 graduate visa, she faced an unexpected challenge. In the process of hunting for an apartment, the 23-year-old discovered that most rentals require prospective tenants to come to the table with a credit history or a guarantor. Meehan Brown had no credit history in the U.S. to establish her legitimacy; and her parents, who live abroad, could not legally act as guarantors.
“I ended up subleasing an apartment from someone who did have a credit score,” says Meehan Brown, who would love to own a credit card, but doesn’t know where to start. “I haven’t purchased anything that requires credit because how do you create a credit history when you need credit to build it?”
While the average credit score for Americans has remained steady — from 673 to 675 since 2017, according to an Experian study — 20-somethings like Meehan Brown face an uphill battle unless they have a taxpayer ID or social security number to establish credit in the first place, according to Justin Harvey CFP, president and founder of Quantifi Planning, LLC.
A Difficult Journey for Immigrants With No Credit
“Immigrants may not be able to start building credit without a secured credit card, which is backed by a cash deposit while functioning as a limit on the card,” says Harvey. “If they have a taxpayer identification number, it might be possible for them to get an unsecured card initially, although it may still theoretically be difficult.”
Many major credit card companies offer secured cards. Some can be initiated with as little as $200, and can eventually be converted to an unsecured card if the person builds good credit history by making payments towards purchases on time or in advance. That’s because secured card companies report the debtor’s payment activity back to major credit agencies, just like unsecured cards. In the event that a secured cardholder does not make a payment in time, the credit card company deducts the purchase from the deposit on file.
Julio Takes a Hit
Unlike Meehan Brown, Julio, a barber in Seattle who wished to not use his full name, was not denied financing when he applied for a loan to buy a car. However, his loan had an extremely high interest rate of 11 percent because he had no credit score.
“They weren't able to offer him a lower interest rate,” says financial adviser Levi Sanchez. “Julio didn’t know how important it was to establish a credit history with something as small as a credit card and by making related monthly payments.”
Credit scores are the most easily translatable credit metric, which major lenders — such as credit card and mortgage companies — use to evaluate an individual’s overall creditworthiness.
“Your chances for an extension of credit or, in some cases, an offer of employment become greater as your score increases,” Heath adds.
Additional considerations that lenders evaluate include current income, the amount being paid monthly to finance other debts, credit repayment history, amount of credit utilization, and total credit available.
“A credit score reflects a person’s history with their debt payments and whether they can be trusted on a quantitative scale by a lender to pay their interest and principal payments towards a loan,” Sanchez says.
High Interest Rates Can Bleed You Dry
Debbie, who lives in Westchester, New York, and also did not wish to use her full name, used a credit card for free for a year and a half. But when she failed to pay off the balance in 18 months, she was charged 43-percent interest on $700 in purchases. The moral of Debbie’s story is to pay attention to what credit cards cost in interest and fees.
Forty-three percent of borrowers ages 18 to 36 have a credit score of 600 or below on the 300-to-850 VantageScore scale, according to a study by the credit-reporting agency TransUnion.
“The higher the credit score someone has, the more likely his or her debt payments are timely, which indicates overall good financial health,” Sanchez says.
There are several decisions that may result in a lower credit score. For example, failing to make timely payments on credit obligations — such as mortgages, car loans, or credit cards — will cause a person’s credit score to drop and create the perception of risk to potential creditors. “Carrying high balances on your credit card or revolving accounts will also adversely affect your credit score,” says Heath of Lexington Law. “High balances can be perceived as not managing your finances wisely, which can also cause potential creditors to think you are a bad risk.”
On the flip side, keeping long-term accounts open and in good standing with a steady payment history denotes stability and can help increase your score.
The Power of Automation
“Getting into a situation where an administrative or court judgment is entered against you can and usually does affect your credit score in a negative manner,” Heath says.
However, there are products out there that can help those who are having credit trouble.
Sanchez advises his 20-something-year-old clients to budget and remain aware of discretionary spending limits by automating their investing and saving activity. “Once everything is automated and savings are sufficient, the client can comfortably spend what’s in their checking account every month after they have established a six-month emergency fund,” he says.
To make budgeting a permanent part of his clients’ financial lives, Sanchez advises them to establish automatic, recurring transfers from their checking account and have them directly deposited to their savings account, brokerage account, or 401(k) plan, or else automatically make a payment towards credit card balances or car loans. “This will help hold you accountable to saving and investing goals and lead to true behavioral change,” Sanchez says.
The Grain Power: Building Credit From Scratch
So how can you build credit without a credit card or with no credit history? And how do you do it simply? A group of people in the financial services technology (or fintech) industry recently got together to tackle just that. They want to help prevent people from getting into situations like those of Meehan Brown, Julio, and Debbie.
Grain is a U.S. fintech startup that wants to replace the credit card. They’re challenging the notion that debit and revolving credit need to be distinct, isolated products. Instead, they think that one should inform the other. Grain is a good match for people who want to build their credit without ever having to take action or think about.
“It has become increasingly difficult to access affordable credit,” says Christian-Robert Joseph, Grain’s chief executive officer. “And building good credit over time can be a daunting task that requires a lot of time and energy. Using AI, Grain makes credit more accessible, affordable, and dynamic so you can continuously build credit without thinking about it, and most importantly, without a credit card.”
To learn more about Grain, visit their site.