Why do millions have a thin credit file or no credit history?
The reason millions of people don’t have a credit score is mostly that they’ve never opened a traditional credit card or obtained a conventional loan, but other factors contribute as well.
Some loan types don’t help people build credit
Many low-income people that don’t have a credit score end up turning to higher interest rate loans, such as payday loans. Payday lenders generally do not report to credit reporting agencies unless the loan isn’t paid back and ends up with a debt collection agency. Therefore, a payday loan can only hurt a credit score and not improve it. Those that frequently turn to these lenders are getting hurt twice: once with high interest rates and again by not getting a chance to build credit.
Another common and fairly new loan type, buy now pay later (BNPL), is tricky because they're treated differently in credit reporting by each of the bureaus. That’s because to account for BNPL loans on a credit score, credit bureaus have to adapt their inputs, attributes, and credit scoring models and lenders have to update their algorithms to account for the changes. On top of that, not all BNPL lenders are reporting loans to credit bureaus to begin with. While some of these loans are reported, consumers can’t reliably use them to build up their credit score if they aren’t certain which loans actually count.
Non-credit bill payments don’t count
Despite the fact that they are paid over regular intervals and show an individual's ability to handle their finances responsibly, bill payments such as rent, utilities, phone, and internet do not always count towards credit scores. There has been some improvement in this area in recent years, as programs such as Fannie Mae’s Positive Rent Payments have enabled underwriters to start counting a borrower’s rent payments towards mortgage loan qualification.
However, the reality is that the majority of bill payments still aren’t reporting to credit agencies, making it a missed opportunity to build credit despite the financial responsibility making these payments shows.
