I LEARNED A NEW TERM LAST WEEK: CREDIT INVISIBLES.

The Consumer Financial Protection Bureau (CFPB) released a report that found nearly 1 in 10 adults — nearly 26 million consumers in the United States — are credit invisibles. What is a credit invisible, you ask? Credit invisibles are consumers who do not have a credit history reported by any of the three major credit reporting companies.

In addition to the nearly 26 million consumers without any credit history, there are another 19 million Americans who cannot obtain a credit score because of insufficient or stale information contained in their credit reports.

Nearly 30 percent of consumers living in low-income neighborhoods are credit invisibles, and an additional 15 percent have stale histories. Compare this to higher-income neighborhoods, where the CFPB found only 4 percent of consumers are credit invisible.

In prepared remarks, CFPB Director Richard Cordray spoke of the impact credit invisibles have on all consumers: “These reports and scores play an incredibly important role in the lives of American consumers. Although the vast majority of Americans have a credit file at the three nationwide credit reporting companies, about 26 million Americans do not. Credit reports and credit scores can determine the terms of people’s mortgages, whether they qualify for auto loans, or if they are eligible for different credit cards. As long as they follow the requirements in the law, potential employers may review a consumer’s credit report as a factor in making a hiring decision. Landlords may also consider this information before deciding whether to approve a potential renter or how much money to require for a security deposit.”

It seems the problem is particularly persistent among black and Hispanic consumers. The CFPB report revealed that 15 percent of all black and Hispanic consumers are credit invisible, compared to just 9 percent of white consumers. What seems most concerning is the analysis seems to suggest that the differences among racial lines materialize early in these consumers’ lives, and persist thereafter.

When I was a kid learning the game of Monopoly, I never could figure out why there was a card in the Chance pile that required me to pay a tax for being poor. It never made sense to me that I would have to pay an extra tax just for being poor.

The obvious conclusion one can make when reading the CFPB report is that the mere lack of credit for many poor and disadvantaged consumers creates a cycle of poverty that becomes very difficult to break. Where do you find the highest densities of “payday loan” companies? In poorer neighborhoods. These companies charge incredibly high rates of interest, in effect robbing consumers in these neighborhoods — stealing from them the opportunity to do more with the income they make, since they are forced to pay higher costs than consumers with good credit histories.

In effect, these consumers have drawn the poor tax card and are forced to pay higher fees and interest simply because they have never established a traditional credit history.

I see it in my practice all the time. The folks who are the most vulnerable are the ones who get taken advantage of the most. I see this with young military families trying to get a start. I see this with black and Hispanic families that are often preyed upon because of their lack of knowledge of the system, or because of language barriers. Probably most concerning, I see this it elderly consumers who put their trust in people, only to be taken advantage of.

The credit reporting companies are trying to do something to help.

I wrote a few weeks ago about a new initiative to create alternative reporting models and scores for consumers who lack traditional credit histories. These new models will, in time, provide reporting on nontraditional credit sources such as utilities and landlords, and other nontraditional resources.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.

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