People without a credit score will soon be able to get credit cards

domoyega | E + | Getty Images

Soon it will be possible to get a credit card even if you don’t have a credit score.

Starting this fall, banks such as JPMorgan Chase, Wells Fargo and US Bancorp will launch a collective pilot program integrating data from applicants’ savings and checking accounts to increase their chances of obtaining a credit card, reported the Wall Street Journal.

The program will include data from all banks and aims to help those who are financially responsible but have not been able to create credit to apply for and obtain credit cards, signaling a major change in l access that could help millions of American adults establish and increase credit. .

“It can certainly be a game-changer for those who may not have had the opportunity to extend credit before,” said Greg Giardino, certified financial planner and financial advisor at JM Franklin & Company in Tarrytown, New York. “I think it’s a great idea.”

What to know about credit scores

A credit score is essentially a risk assessment that financial institutions use to determine how to lend to consumers. Without a credit score, it can be difficult to access things like credit cards and bank loans, and lenders will not give these borrowers favorable terms.

People who only pay for things with debit cards or cash or who are new to the US often don’t have a credit score and can rely on things like payday loans for credit.

According to Fair Isaac Corp., creator of the FICO metric, about 53 million American adults do not have traditional credit scores. Of these, black and Hispanic adults are more likely than their white or Asian counterparts to not have a traditional credit score, according to a 2015 report from the Consumer Financial Protection Bureau.

A FICO credit score is calculated using factors such as payment history, total debt, types of credit, new credit, and length of credit. It does not take into account income, savings, utility bills, debit transactions, or your professional status.

More than Invest in yourself:
You can still use free college money – here’s how
How I learned to invest in stocks – and you can too
College students gain career experience as social media brand ambassadors

“There has always been a little catch in the way the system has worked,” 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 credit, don’t you?”

He added that this was also a problem for immigrants, and one he faced – when he moved to the United States from the Netherlands 15 years ago, he almost had to start over even though he had established a credit in another country.

Of course, there are ways to create credit without having a credit card, such as using a credit builder, using a service that includes rent on a credit report, or by paying off installment loans (student debt, auto loan). or mortgage) on time. But generally having and using a credit card effectively is the best way to build strong credit over time.

Credit cards can be a valuable financial tool

A credit card – if used correctly – can be an important and useful financial tool, according to Giardino.

On the one hand, a credit statement can be useful for budgeting because it creates an easy benchmark for how you spend, he said. It can also help those with limited cash flow to pay for essentials when they need them instead of waiting for a paycheck.

And, many cards offer perks that give extra points or cash back rewards for certain purchases.

“It can be really useful and meaningful,” Giardino said.

Plus, using a credit card correctly – that is, paying it off in full and on time each month – will increase your credit score. Having a good credit rating can save consumers in the long run if they take out more loans.

“Auto loans, mortgages, any kind of loan you can think of have a lot to do with that score,” Lawrence Sprung, CFP, founder and wealth advisor at Mitlin Financial in Hauppauge, New York.

Having a good credit score, typically 670 or higher, could save a borrower thousands of dollars over the life of the loan and repayment, Sprung said.

This is because people with better credit scores are considered less risky to lend and are given better terms, such as lower interest rates, when they borrow.

But they also carry risks

Of course, there are also pitfalls associated with credit cards and if not used effectively they can hurt your credit score.

If someone spends too much and can’t pay off the full statement balance or pays their bill late, high interest will accumulate and deepen debt.

Banks and other financial institutions should help ensure that people who get first-time credit cards use them wisely, according to Sprung.

“Whether you have a credit score or not, it’s important to have that educational component,” he said, adding that this is especially important because those who don’t have a traditional credit score but want credit cards will need to have banking relationships.

It also means that there is a chance for banks to encourage the underbanked or unbanked to establish a relationship with them, he said.

SUBSCRIBE: Money 101 is an 8-Week Financial Freedom Learning Course, delivered weekly to your inbox.

CHECK: How To Make Money With Creative Effort, From People Making Thousands On Sites Like Etsy and Twitch Going through Growing up with Acorns + CNBC.

Disclosure: NBCUniversal and Comcast Ventures Invest in Tassels.

About Wanda Wall

Check Also

Two Day Trader Review (Hilary Kramer) What is the X Signal System?

Greentech Research CEO and Two-Day Trader Editor-in-Chief Hilary Kramer reportedly discovered a micro-market strategy that …

Leave a Reply

Your email address will not be published.