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It will be possible to get a credit card soon, even if you do not have a credit rating.
This fall, banks such as JPMorgan Chase, Wells Fargo as well as USA Bancorp will launch a collective pilot program that incorporates data from savings and checking accounts of applicants to improve their chances of getting a credit card, The Wall Street Journal reported.
The program will include data from multiple banks and aims to help those who are financially responsible but have been unable to apply for loans and get credit cards, signaling a major change in access that could help millions of American adults create and increase credit. …
“This could definitely be a game changer for those who may not have been able to provide credit previously,” said Greg Giardino, a certified financial planner and financial advisor at JM Franklin & Company in Tarrytown, New York. “I think this is a great idea.”
What you need to know about credit ratings
A credit rating is basically a risk assessment that financial institutions use to determine how to provide loans to consumers. Without a credit rating, it can be difficult to access some things, such as credit cards and bank loans, and lenders will not provide preferential terms for these borrowers.
People who only pay for things with debit cards or cash, or newcomers to the US, often don’t have a credit rating and may rely on things like payday loans.
According to the data, about 53 million American adults do not have traditional credit ratings. Fair Isaac Corp.., creator of the FICO metric. Black and Hispanic adults are more likely than their whites or Asian peers to lack traditional credit ratings, according to a 2015 report by the Bureau of Consumer Financial Protection.
The FICO credit rating is calculated using factors such as payment history, total debt, loan types, new loan, and loan term. It doesn’t account for income, savings, utility bills, debit transaction, or your job status.
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“There has always been a bit of a snag in how the system works,” said Rutger van Faassen, head of product and market strategy for FBX at Informa Financial Intelligence. “You have to have a good credit rating to get a loan, right?”
He added that this is also a problem for immigrants that he faced – when he moved to the United States from the Netherlands 15 years ago, he almost had to start all over again, although he received a loan in another country.
Of course, there are several ways to create a loan without a credit card, such as with a credit builder, through a service that includes rent on a credit report, or by paying off your installment loans on time (student debt, car loan, or mortgage). But generally, having and using a credit card effectively is the best way to build up solid credit over time.
Credit cards can be a valuable financial tool
According to Giardino, a credit card – when used correctly – can be an important and useful financial tool.
On the one hand, a credit report can be helpful in budgeting as it provides an easy reference point for your spending, he said. It can also help those with limited cash flow pay for basic necessities when they need them instead of waiting for paychecks.
And many cards come with privileges that give you extra points or cashback for certain purchases.
“It can be really useful and meaningful,” Giardino said.
Plus, using your credit card correctly – that is, paying it in full and on time – will boost your credit score. A good credit rating can save consumers in the long run if they take on any other loans.
“Auto loans, mortgages, any type of loan you can think of has a lot to do with that score,” said Lawrence Sprung, CFP, Founder and Welfare Advisor at Mitlin Financial in Hauppog, New York.
Having a good credit rating, typically 670 or higher, can save a borrower thousands of dollars over the loan term and maturity, Sprung said.
This is because people with better credit ratings are considered less risky to lend and are given better terms such as lower interest rates when they borrow money.
But they also come with risk.
Of course, there are pitfalls associated with credit cards, and if not used effectively, they can wreak havoc on your credit rating.
If someone overspends and cannot fully pay off the balance on the statement, or pays the bill late, interest will be high and even more deeply indebted.
Banks and other financial institutions need to help ensure that people who get credit cards for the first time use them wisely, Sprung said.
“Whether you have a credit rating or not, it’s important to have this educational component,” he said, adding that this is especially important as those who do not have traditional credit ratings but want credit cards will have to have banking relations.
It also means that banks have a chance to encourage low-income or non-bank people to establish relationships with them, he said.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns…