The Challenges of Having No Credit or a Low Credit Score ~ Credit Sesame

Credit Sesame on the challenges of having no credit or a low credit score.

For most Americans, access to credit is a convenience taken for granted. As simple as reaching into a pocket for a credit card or tapping on an app.

For those without access to credit, the inconvenience is significant. Lack of credit poses bigger challenges results in barriers to opportunities and wealth building that widen the gap between the poor and other Americans.

This article looks at the challenges faced by people without ready access to legitimate sources of credit, and what course of action may be taken to change this.

What’s the difference between no credit score and a low score?

In today’s society, a credit score is the key that unlocks access to credit. A low credit score, or no credit score at all, cannot unlock credit.

However, there are important distinctions between having no credit score or a low credit score.

Low credit score

Low credit scores result from having used credit, but not establishing a history of using it responsibly. This may mean having too limited a history of credit use, or having had problems with credit in the past.

No credit score

People with no credit score typically have absolutely no credit history (good or bad) on record with the three major credit bureaus. These folks are described as being “credit invisible.”

Other people with no credit score have some official record of credit use, but not enough to generate the data necessary to calculate a credit score. This is because they haven’t used credit enough, or their credit use is too far in the past to count. This group is described as being “unscoreable.”

There are significant numbers of credit invisible and unscoreable Americans. The Consumer Finance Protection Bureau estimates that there are 45 million adults in the United States who fit into these categories.

On top of that, roughly one-third of people with credit scores have subprime credit (scores below 670). Add these groups together and you get a broad section of the population with limited access to credit.

Credit scores and access to credit

The chart below gives some feel for how a low credit score affects access to credit. It shows results from from the Federal Reserve’s 2021 Survey of Household Economics and Decisionmaking.

Low credit score and credit card ownership

This chart depicts how credit score correlates to credit card ownership. If you have fair or better credit, chances are you have access to credit. If you have a poor credit score – or no credit score at all – chances are you don’t.

Lack of access to credit limits options

People without credit lack some of the options that most consumers consider vital. Here are some examples:

Online shopping. It’s hard to buy things online without credit. This restricts people without credit from the breadth of choice and money-saving opportunities available to most consumers.
Ability to make big-ticket purchases. For most people, buying a house or even a car would be very difficult without the ability to pay it off over time with a loan. If you don’t have credit, these purchases are next to impossible.
Buying flexibility. Credit gives you more flexibility as to when you make a purchase. Being able to buy when there’s a sale or before prices rise can save you money – especially in these inflationary times.
More job opportunities. Some employers look at credit scores as an indication of how responsible applicants are. People with poor credit scores may be at a disadvantage in a job search.
Housing choices. Not only is it very difficult to buy a house without credit, but it may be even hard to rent a place to live. Some landlords look at credit scores to indicate how likely a potential tenant is to keep up with the rent.

Higher costs lead to a cycle of poverty

Not only are people without good credit scores denied some opportunities, but they may encounter added expenses such as the following:

Higher interest rates. Look at credit card ads and you’ll often see they give a range of APRs with a difference of about 10% from highest to lowest. Of course, people with the best credit scores get the low rates, and people with poor credit scores get the higher ones. A 10% difference in interest rate would cost you $500 a year in extra interest on a $5,000 balance.
Payday loans. Even the highest credit card rates may seem reasonable compared to the cost of payday loans. These are often considered predatory loans because they target people with poor or no credit, and charge exorbitant fees.
Locked into renting rather than owning a home. It’s next to impossible for most Americans to buy a home without a mortgage. So, instead of building equity over time, people without credit have little choice but to continually erode their net worth by paying rent.
Higher insurance rates. Except in a few states that ban the practice, insurance companies frequently use credit history as a factor in setting insurance premiums. That means people with bad credit pay more.

The Fed study cited earlier in this article found that low-income Americans are far less likely to have credit cards than upper-income ones. The chart below compares the percentage of low-income and high-income Americans with credit cards:

Low income and credit card ownership

If we assume this disparity in credit card ownership is true of access to credit in general, it means people with lower incomes often face higher expenses for credit, and the things they buy using credit, than wealthier people. This widens the gap between rich and poor.

Credit as a step towards financial progress

Access to credit is more than just a convenience. Used correctly and responsibly, access to credit can be a step towards making financial progress.

People with no credit or poor credit histories can start along this pathway by finding ways to use mainstream credit products, even in very limited forms. Then the key is to use that credit responsibly to build the right kind of history.