A new government-backed program featuring some of the nation’s largest banks aims to help you get a credit card even if you don’t have a credit rating.
According to The Wall Street Journal, banks such as JPMorgan Chase, Wells Fargo and US Bancorp may begin a pilot program this year that evaluates information from applicants’ checking and savings accounts to improve the chances of a card being approved. The goal is to help underserved but financially responsible Americans access credit.
According to the Consumer Financial Protection Administration, approximately 45 million Americans may be denied a loan because they have no credit history and are “invisible.” Those without a credit rating usually pay with cash or debit cards.
“Building a strong credit history is one of the first steps towards buying a home and achieving other important financial goals,” says Jeff Arevalo, a financial well-being expert at GreenPath Financial Wellness, a non-profit lending advisory agency.
“If this initiative helps people succeed in meeting these financial goals, then it can definitely have a positive impact,” he says.
How will the program work?
Banks participating in the program will exchange information from deposit accounts in order to enable financially responsible clients with no credit rating to obtain a loan.
When evaluating loan applicants, banks check account balances, payments and overdrafts. For example, opting out of an overdraft facility can improve your chances of getting a new credit card.
This is a departure from the traditional credit card approval model, which relied heavily on the applicant’s credit rating and credit report.
Arevalo notes that those without credit histories are most often Black or Hispanic. “It could help a lot of households,” he says. “Using credit cards wisely is part of your financial health.”
What are the disadvantages of the program?
The program has great potential, but also a potential danger for underserved borrowers who do not use new credit cards responsibly, says Arevalo.
“We do not want this easier access to credit to lead to an increase in consumer debt,” he says.
Arevalo says that if you’re new to lending, don’t forget:
- Make payments on time to avoid late payments.
- Pay off balances to avoid interest.
- Keep your overall debt in check.
“If people make the minimum payments and keep shopping, their debt will grow rapidly,” he says.
He adds that the emergence of bad habits can increase consumer stress and possibly undermine their financial future.
“If a person gets into the habit of making late payments or taking on more debt than they can handle, then that worsens the credit rating,” says Arevalo. “They will have to take additional steps to repair the damage.”
What are the options for no or bad credit history?
Even if you don’t have credit or have a thin credit history, you can create a great credit history on your own. Here are some tips from Arevalo to increase your credit profile:
Become a authorized user to the account of a creditworthy and reliable person. Ask a family member or friend if they can add you to his or her credit card. “Just keep in mind that adding another person to your account can affect you both positively and negatively, depending on how you use it,” says Arevalo.
Consider opening secured credit card… No credit history is required for this type of card, but you will need to pay a security deposit in order to open an account. Your deposit is usually the same as your credit limit.
Apply for store credit card… Use your card responsibly – pay in full and on time – and you can start building a strong credit history.
Be aware of other payments. Timely payments for utilities, car loans, and student loans can help you build up your credit history. “Ask these companies to report payment activity to the credit bureaus,” Arevalo says.