The U.S. Credit System Is Failing Millions of Americans. Here’s What You Can Do About It

A photo to accompany a story about barriers to credit access in the U.S. Getty Images
In many low-income and minority communities, personal finance expert Bola Sokunbi says the opportunity for credit is limited to payday loan and check-cashing businesses like this one shown in Gaithersburg, Maryland. For Americans who face extra challenges accessing the credit system, it starts with learning how it works.
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Dee Olateru immigrated to the United States from Nigeria in 2002 just before her 17th birthday, to attend college. She had no idea what credit was, let alone how to use it responsibly. 

Dee Olateru
Dee OlateruCourtesy of Dee Olateru

It’s a common issue for many Americans. The easiest way to build credit is through responsible credit use, but that’s difficult when you’re starting from zero or were never taught how lending works. And research indicates that some Americans face larger hurdles than others. 

People of color, those from low-income households, and immigrants across the U.S. may face increased challenges when it comes to building and maintaining good credit. This, in turn, makes borrowing money more difficult and more expensive — leading to issues with debt, difficulty securing housing and employment, and holding many underserved communities back from building wealth.

“I was oblivious to anything about the financial systems in the U.S., including the system of credit,” says Olateru, 36, now a consultant at an accounting firm and founder of The Rich Immigrant, a personal finance blog. As a result, she says she made several mistakes along the way, including maxing out her first credit card and making minimum payments for a long time while the debt balances grew. 

Despite systemic barriers holding millions of Americans back, there are things you can do build or repair your credit. It starts with knowing how the system works.

“I think many of us are just in that position where we’re just doing what we need to do to survive,” Olateru says. “We don’t know what we don’t know.”

Who Does the Credit System Leave Out?

Olateru is one of many who thinks the American credit system is stacked against underprivileged communities from the start. 

“We see strong racial disparities in credit health that have endured over time,” says Kassandra Martinchek, a research analyst for the Center on Labor, Human Services, and Population at the Urban Institute, pointing to data collected on credit health during the COVID-19 pandemic. 

The issue for many people disadvantaged by the current system, she says, is a lack of credit history, which leaves the scoring systems unable to generate a score for them at all. Around 45 million adults are considered “credit invisible,” meaning they either have no credit score or thin credit files without enough information to create a credit score, according to data from the Consumer Financial Protection Bureau (CFPB).

Black and Hispanic Americans are more likely than white and Asian Americans to have no credit score or have unscored credit records according to the CFPB data — about 15% of Black and Hispanic Americans don’t have a credit score compared to 9% of white and Asian Americans. What’s more, around 30% of Black and 25% of Hispanic Americans say they never even had the chance to build good credit, according to a recent survey from Credit Sesame, a credit monitoring service. 

Martinchek says low-income consumers make up another demographic disproportionately disadvantaged by the credit system. About 45% of adults in low-income neighborhoods are credit invisible or have unscored credit records, the CFPB data shows.

Immigrants like Olateru also often struggle to build credit. They may face language barriers, lack prior knowledge of the credit system, or simply have no experience using credit in the U.S. Even if they have established credit from another country, those records and financial history rarely transfer over to the credit system in the U.S. 

What’s Stopping People From Building Credit?

CFPB data suggests that credit invisibility starts in early adulthood and can last over time. Family or community support can be important to getting a first bank account or credit card. 

“There is a lack of financial literacy where they just don’t know what approach to take in terms of getting credit,” says Bola Sokunbi, founder of Clever Girl Finance. “There is also the issue of minorities being underbanked, which means that they’re unlikely to inquire about credit because they don’t have a bank account.”

Whether someone grew up in a community with few financial institutions, lacks the funds to open a credit or a bank account, or simply finds the credit system intimidating and confusing — they may be at an early disadvantage to building credit, and that can pass down through generations.

Add any past credit mistakes or credit report errors into the mix, and it can make things even more complicated. Errors are common: one in five people have an error on their credit report, according to a 2012 study by the Federal Trade Commission

Pro Tip

If you don’t know whether you have credit, check your credit report to see exactly what’s on it. You can also make sure your information is recent and error-free. Through April 2022, you can get free weekly access to your credit reports through the credit bureaus.

You could have a job and regularly pay your bills on time, but if you lack a credit history, your score will be low or simply nonexistent. That’s because traditional credit score models don’t consider factors like rent, utility payments, TV and phone bills, or deposit account information. Credit scores also rely heavily on the number of years a person has had and used available credit.

This narrow view of creditworthiness has led to a system riddled with structural inequality, according to Aaron Klein, a senior fellow in economic studies at the Brookings Institution. 

“Most people need to borrow at some point in their life for a car, for a house, to start a business,” Klein says. “And the information I have about you from the past is going to help me predict your future. That’s great if the past was based on fair and equitable treatment of groups, but we know it isn’t.” 

Disadvantages of Living With Limited or No Credit

It’s no secret that credit scores matter in the U.S. Credit is a way to build wealth, gain career opportunities, and secure housing. Without it, you’ll struggle to qualify for everything from an auto loan to a mortgage and even most credit cards. Here’s a look at some of the ways that having limited or no credit history can make life harder: 

Borrowing Is Harder and More Expensive

Before approving a loan, lenders use your credit history to assess your risk of defaulting. Without credit, it’s a lot harder and more expensive to borrow money from traditional lenders because it’s more difficult to prove your repayment ability. Even if you qualify, you’ll probably have unfavorable terms and a high interest rate.

Most credit scoring models, like FICO and VantageScore, use a range between 300 and 850. Urban Institute data shows borrowers with Vantage scores equal to or less than 600 pay nearly $400 more in interest for a $550 emergency loan over three months, according to Martinchek, and $3,000 more in interest for a $10,000 used car loan over four years, compared to borrowers with good credit scores.

This leads many people without credit histories to turn to predatory lenders with sky-high interest rates and fees, often leaving them in a cycle of debt and unable to meet financial goals.

“When you look into many of these minority communities, the opportunity for credit is the payday loan or the check-cashing place on the corner of the main street of their neighborhood,” Sokunbi says. 

Barriers to Housing and Employment

Without an established credit history, you may have a hard time qualifying for a mortgage or renting an apartment. Just like with an auto or personal loan, lenders use your credit history to make lending decisions for mortgages, and a good score indicates that you’re more likely to pay them back. Even if you rent, some landlords will run a credit check when you apply for an apartment to help determine how likely you are to pay your rent on time each month.

Some employers will also check your credit before making hiring decisions, often looking to gain insight into your past responsibility or any signs of financial distress. Only 11 states — California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington —  and the District of Columbia prohibit employer credit checks or restrict how the information from reports can be used.

Higher Insurance Costs

In many states, insurance companies use your credit to help determine your auto insurance premiums. They can pull information from your credit report to give you a credit-based insurance score, similar to credit scores. If you have poor credit or no credit, you are more likely to pay higher insurance premiums. 

Following debate on it being a discriminatory practice, some states have banned use of credit in pricing auto insurance, including California, Hawaii, Maryland, Massachusetts, Michigan, Oregon and Utah.

Ways to Build Credit From Scratch

Even with no credit history or prior high-interest debts, there are ways to enter the system and begin building credit or working to repair a previously damaged credit score. And new scoring models and technologies are making credit more accessible than ever. Here are a few ways you can begin to build, or rebuild, your credit: 

Connect With Local Organizations

If you feel intimidated or overwhelmed by the credit process, local credit bureaus and community-based organizations are good resources for assistance. They can work one-on-one with you to offer financial literacy tools and resources, provide options to obtain credit, and help you build a positive credit history. 

Community Development Financial Institutions, or CDFIs, are a great place to start. These may be banks, credit unions, or other private financial institutions that offer accessible financial services within financially vulnerable communities. To find a CDFI near you, check out the Opportunity Finance Network’s CDFI locator tool.

You may also want to speak with a credit counselor about your finances, especially if you’re carrying debts. Free or low cost credit counseling is commonly offered through nonprofits, and can offer a range of solutions, from expert advice to debt management plans. The National Foundation for Credit Counseling and the Financial Counseling Association of America are good resources to find a reputable credit counselor.

Secured Credit Cards

Building credit from scratch, or rebuilding credit from past mistakes, are both possible if you start slowly with the right financial tools. 

Secured credit cards are easier to qualify for than most general credit cards. That’s because, instead of being assigned a credit limit upon approval, you’ll be required to pay a refundable cash deposit when you open your card, which acts as collateral and protects the issuer against any unpaid charges. The minimum security deposit required is often around $200-$300, and typically acts as your card’s credit limit. After you establish a pattern of consistent payments, many issuers will refund your security deposit, and may offer to upgrade you to an unsecured card. 

But before you sign up, make sure you have the cash to pay the deposit upfront, and read your card agreement carefully so you know what’s expected of you as a cardholder. 

There are also card options you may be eligible for without a security deposit. These cards are designed to be more accessible and use an alternative approval process, so they don’t require a normal credit score to qualify. 

For example, the Petal® 1 “No Annual Fee” Visa® Credit Card, issued by WebBank may use your income, savings and spending habits reported in your application to create a “Cash Score” to determine your approval instead of your credit history. It functions just like a normal credit card. The Tomo Credit Card is another option that doesn’t consider credit history during the approval process, instead relying on banking information you provide in the application. But unlike a typical card, the Tomo card requires you to make weekly payments through an autopay system that prevents you from carrying any balances. 

Credit Builder Loans

A credit builder loan is specifically designed to help you improve your credit score. After approval, the lender holds the amount borrowed — generally in the range of $300 to $1,000 —  in a bank account while you make payments over a period typically set at 6 to 24 months, according to insight from the CFPB. Your lender reports your payment history to the credit bureaus to help you build your credit history, and you, in turn, generally receive the money only after you pay the loan in full. 

Another option to build credit is simply borrowing a low-interest personal loan through your local credit bureau and paying it back over time responsibly, but you should only do that if you feel confident about paying it back. “The key to building credit successfully is making your payments on time,” Sokunbi says

Join a Lending Circle

A lending circle — in which you and several others all pitch in to lend each other money — can be an affordable way to build credit, as long as you make sure your payments are reported to the credit bureaus. Joining lending circles through companies like the nonprofit Mission Asset Fund, mobile app Esusu, and website EMoneyPool make it easier to guarantee your payments are reported.

For example, Mission Asset Fund only requires that you have a source of income and “manageable” amount of debt to participate in a lending circle, according to its website. If your debt exceeds more than half your income, the company requires you to take its financial education courses before you can join a lending circle. The organization’s lending circles consist of six to 12 people, with loan amounts from as little as $300 to $2,400, and monthly payments ranging between $50-$200. 

If you want to join a lending circle, make sure you do thorough research ahead of time to avoid hidden costs or scams. Look for lending circles that report to at least one of the three major credit bureaus, but ideally all three: Experian, TransUnion, and Equifax

Use Alternative Data Scoring 

Traditional credit score models look at five main factors to calculate credit scores, including payment history, amounts owed, length of credit history, new credit, and credit mix. But over the last few years, more companies have begun incorporating additional information — like rent and utility payments — to help more people access loans and bank accounts. Urban Institute data suggests that factoring in such additional information could enable credit scoring for more than 50 million people and raise credit scores for those with thin files.

Already, FICO (the most commonly-used credit scoring system) offers two alternative data scoring products — FICO Score XD and UltraFICO Score. FICO Score XD uses utility, phone, and TV bill payment data to generate a traditional FICO score, whereas the latter uses deposit account information to do the same. Experian also offers a product called Experian Boost that allows consumers to boost their credit score by sharing their TV, phone, and utility bill payments.

These products are intended to open the door to building credit, but they’re still a work in progress. You have to actively sign up to participate, and alternative data isn’t universal across all scoring models, so you can’t guarantee which score a lender or creditor is going to pull. 

Become an Authorized User

If you have a trusted loved one with good credit, a great way to build credit yourself is to become an authorized user. A parent, spouse, other family member, or even a close friend can add you to their credit card account, allowing you to charge purchases and build credit history. But the primary cardholder is still responsible for any charges.

This requires a high level of trust with the primary cardholder of the account, so make sure the person you choose is financially responsible and pays their balances on time each month. You should also establish from the beginning how you’re going to pay them for any charges you make, and how you will use the card.

Do Your Own Research

Financial literacy can be one of the biggest barriers to building credit, saving, investing, and more. You can empower yourself financially by doing your own research through books, podcasts, online government resources, and reputable mainstream media sites on the internet. 

“Even though there is the financial literacy gap, many people have access to a smartphone or to the internet where they can do research,” says Sokunbi. 

That’s what Olateru did. As a young immigrant, Olateru didn’t have parents with credit in the U.S. to explain to her how the system works or how to build wealth. Instead, she turned to Google to teach herself about personal finance. 

“I had to have my ‘aha’ moment, and that was when I was graduating,” she says. “I had some tuition to pay off, had no job, had credit card debt, and realized I needed to figure my life out. And I went to Google.”

Olateru says she’s still on her financial literacy journey. But she’s learned the biggest form of wealth you can pass down is knowledge. Sokunbi shares a similar philosophy.

“It’s important for us to kind of pay it forward in terms of talking to our friends and our family and other members of our communities about what we learned from a personal finance perspective,” says Sokunbi. “Credit is nothing but a tool, and it’s all about how you leverage that tool.”

Helpful Resources