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Low income areas become credit visible when negative records hit

Credit cards, student loans play prominent role

The Consumer Financial Protection Bureau released a study that shows Americans in lower-income areas are more likely to become credit visible after receiving a hit to their credit score.

The study also found that the percentage of consumers transitioning to credit visibility due to student loans more than doubled in the last 10 years.

“It is no secret that lower-income consumers face challenges in the financial marketplace,” CFPB Director Richard Cordray said. “Today’s study shows that even at the beginning of their financial lives, they are faced with higher hurdles to gain access to credit, which hinders them from turning their version of the American dream into reality.”

In 2015, the CFPB estimated 11% of adults in the U.S., or 26 million people, are credit invisible with no credit history at one of the three nationwide credit reporting companies.

This creates major homeownership barriers for the lower-income population as they do not take the more traditional routes of beginning to build up credit.

According to the CFPB, this issue disproportionately impacts consumers who are African American or Hispanic, and people who live in low-income neighborhoods. It can also impact some recent immigrants, young people just getting started, and people who are recently widowed or divorced.

The National Association of Hispanic Real Estate Professionals, at their annual conference in March, explained that many lenders struggle to overcome cultural barriers to serve Hispanics.

Back in February, the CFPB announced its initiative to increase lending to the credit invisible population.

The study looked at how consumers first establish credit history by reviewing de-identified credit records of more than 1 million consumers who became credit visible. It examined when consumers transitioned out of credit invisibility and how they did so.

The study found that nearly 80% of transitions away from credit invisibility occur before the age of 25, and credit cards are the most common way Americans establish that credit. But higher-income Americans were 30% more likely to establish credit using a credit card than those that were lower-income.

Overall, about 15% of consumers established their credit by relying on co-borrowers and another 9.6% became an authorized user on someone else’s credit account. This number is drastically different between high- and low-income areas.

At 30%, higher-income borrowers were 100% more likely to establish credit by depending on someone else compared to 14.9% in lower-income areas.

The report also showed that the percentage of Americans who became credit visible due to student loans more than doubled in the last 10 years.

As more people acces student loans, a trend which keeps many Millennials from homeownership, companies began to launch creative solutions. For example, BurkeyLoan recently announced its BurkeyLoan Mortgage division, which included its 120% loan-to-value mortgage product that funds both a home purchase and the borrower’s student loans.

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