No credit score? A credit card can still be in your future. A handful of major banks are rolling out new credit card options that will factor in your banking habits as part of the approval process. If you’re a diligent banker with good money management, a new credit card could be within your reach.
A report from the Consumer Financial Protection Bureau noted that more than 53 million Americans are “credit invisible,” meaning they have no established history with any of the three main credit reporting bureaus. A lack of credit can be a barrier to entry for new credit applicants, which can severely limit their access to borrowed funds.
In the near future, though, this might no longer be the case. Here’s more on a new pilot program that’s giving more weight to demonstrated banking history than credit score.
Why Credit Scores Matter to Lenders
Typically, lenders place a lot of emphasis on credit scores. These scores are used to assess a borrower’s likelihood of repaying borrowed funds on time (or at all). Credit scores are made up of a number of factors, including repayment history, amount of credit in use compared to total available credit, the age of your credit accounts, and the types of credit accounts. The higher your credit score, the less of a risk you appear to be to lenders.
Without this credit score, lenders don’t have a way to determine your risk. This is why it’s so hard for individuals without a credit score to get approved for a credit card from a major issuer.
This concept of offering traditional credit cards without a credit score isn’t wholly new. For example, fintech company Petal introduced a credit card in 2018 that didn’t require a credit score. Instead, applicants connected their bank accounts and received a decision based on how well they managed their money. Recent changes have also occurred to the FICO scoring model to give some weight as to how users manage their bank accounts.
Overall, this new direction for gaining credit access is poised to turn the industry on its head.
Which Banks are Offering Credit Cards Based on Banking History?
Many major banks in the U.S., including JP Chase Morgan, Wells Fargo, and US Bancorp, are participating in the pilot program. This program will be launched sometime in 2021. A complete list of banks is not yet available. More details on the program are expected to be released when the program rolls out.
If you bank with one of the major U.S. banks, chances are the program will be available to you. You can check with your local branch for more details. If the program is a success, many other banks may eventually follow suit.
How the New Program Will Help Consumers
While there are already alternatives for credit if you don’t have a credit score, such as a secure credit card or getting a cosigner, these options often come at a much higher cost. Interest rates are usually higher, limits may be lower, and the road to building credit can be long and slow.
That’s what makes this new pilot program so valuable. Your credit score is less of a factor when determining approval and instead relies on your demonstrated banking history. What’s more, the credit cards are more along the lines of a regular credit card, not a starter credit card or secured card.
If you maintain a healthy bank balance, avoid going into the red, have no returned checks, and have a steady cash flow, then your chances of getting approval for one of these credit cards increases.
This is a huge step forward for consumers that have typically been left out of credit conversations. Individuals who are new to the country or otherwise don’t have an established credit history may now have a viable way to build credit with a relatively low bar to entry. This also helps eliminate the seemingly impossible loop of needing good credit to get access to credit.
As with any credit card, the new credit card pilot program can help individuals with no credit history to start building credit that will allow them to increase their borrowing power. For many, this could mean finally being able to get approved for an auto loan, a mortgage, or credit cards with rewards and favorable terms.
The program is expected to roll out to consumers in Fall 2021. In the meantime, you can start to prepare right now by demonstrating good banking habits. Reviewing and adjusting your budget, mitigating your risk of overdrafts, and monitoring every bank transaction can help you keep a finger on your financial pulse. It’s never too late to focus on finances.