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If Your Child is an Authorized User on Your Credit Card, Do They Automatically Start Out with an 800 Credit Score?

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“If you have a credit card and a kid, add your kid on as an authorized user and pay the bill on time. By the time that kid hits 18, boom 800+ credit score for them to succeed in this world.”

Reporting

On February 18 2020, the Facebook page “Real Badass Moms” shared a screenshot of the following tweet, which advised people “with a credit card and a kid” to add their child as an authorized user on that card — an act that would purportedly grant the child a credit score of 800 when they turned 18 (provided that payments were timely):

It read in full:

If you have a credit card and a kid. Add your kid on as an authorized user and pay the bill on time. By the time that kid hits 18. Boom 800+ credit score for them to succeed in this world. Schools ain’t teaching this. It’s up to us.

The post on “Real Badass Moms” was shared more than 75,000 times in just over a week; @mama_thickmadam’s tweet was liked nearly 200,000 times and shared nearly 50,000 times.

Clearly, readers liked what sounded like a good idea on paper, particularly parents of children entering into a difficult financial climate in 2020. But some of the top response tweets disputed the tweet’s advice. Some users posited that should the parent themselves encounter financial difficulties (many of which, such as car accidents or medical expenses) are unexpected, the child might be worse off in general or turn 18 with a “tanked” credit score:

“Imagine something terrible happens and your child is 18 with a pre-tanked credit score because their parents thought they’d help. Be rich or dont do this. Schools do teach stuff like this, your school just didn’t. Mandatory personal finance class in my high school in nowhere[.]”

“And also don’t have any expensive emergencies, don’t become disabled and unable to work, etc etc. People get bad credit lots of ways, unforeseeable ways. I can see maybe putting your kid on your credit card for a few months before they turn 18 but that’s enough.”

Others Twitter users claimed they were either beneficiaries of the advice or familiar with it, but that with no credit history otherwise, a 750 score alone was unhelpful:

“It doesn’t help as well as you think. I had 780 coming out of college and was denied for credit cards because of “no credit history”. It’s a high score but it’s basically a fake score according to credit agencies.”

“It’s a good place to start but the score alone isn’t enough to have good credit. I’ve worked in a financial institution for some time and have seen plenty of people with authorized user trades on the credit file with a good score get declined. It doesn’t show experience at all.”

“It can help. But as an underwriter I wouldn’t lend an 18 year old any funds even if the credit score was 800. Bc there is no true payment history. Got to have more than a good score. But yes. Parents need to teach these things early ❤️❤️”

If that claim was accurate, the ratio of risk (that a parent’s score could drop through no fault of their own, affecting the child) seemed possibly higher than the reward (a child starting adult life with a 780 or 800 credit score).  Others said that they did add a child as an authorized user (or were added by parents), and consequently obtained or transferred a high credit score:

“this is how my credit was built and i didn’t know it until i checked it one day for no reason and i had a 750 lol i don’t even use my credit, but it’s nice knowing it’s there”

“my mommy did this for me and i’m not finna brag but i have an amex, venture card, perf credit score (u still gotta pull ur own weight tho bc even if u have an 800 u might not get approved for stuff bc of ur age), and hella flyer miles to go anywhere”

Finally, at least one commenter claimed that being added as an authorized user on another person’s card was a factor in boosting their score from 550 to 796 in under a year:

I fucked up my own credit long ago. Jus fixed all my negative remarks about a year ago. Had my OG add me on to her card. Went from a 550 fico to a 796 fico in about 8 months.

If comments on the tweet were to be believed, the advice was of mixed veracity. Some reported obtaining high scores after parents added them as authorized users, but others said those scores were not as effective as scores obtained by building credit personally — the latter echoed by people claiming to work with lending institutions. And though the tweet indicated the advice worked if the card was paid off “on time,” others cautioned that many people with high credit scores could encounter financial trouble, which would adversely affect authorized users.

In discourse about the advice, “FICO scores” came up quite a bit. FICO (formerly Fair and Issac Co.) is a data analysis firm known for providing credit scores. FICO scores are used by three major credit bureaus (also known as credit reporting agencies, or CRAs) — Equifax, Experian, and TransUnion. According to FICO, their scoring is used by “top lending institutions” in the United States, and it “rank-orders consumers by how likely they are to pay their credit obligations as agreed.”

FICO scores were not always a major factor in loans and extensions of credit. What we currently call a FICO score came into play about three decades ago:

[Bill Fair and Earl Isaac, two statisticians] made a number of correlations between which behaviors made a person a good credit risk and which made them a bad credit risk. And for the most part, their predictions were accurate. But it wasn’t really until the 1970s that credit scores became as important in lending as they are now. The modern iteration of the FICO score, based on credit files from the three credit bureaus — Equifax, Experian and TransUnion — was introduced in 1989.

Before credit scores, people still had credit reports. But these reports weren’t distilled down into three-digit numbers. “Credit scores took a lot of randomness out of lending,” says Ken Lin, CEO of CreditKarma. “Scores were developed in the ’50s, but became much more prevalent in the ’70s, ’80s and ’90s.”

In the thread, users claimed having high scores and no credit history was not very helpful; Lin estimates that a person’s credit score is “only 20% to 40% of the final decision, with the rest being hidden deeper inside the overall credit report and its extenuating circumstances.”

A lot of credit card and finance blogs offered advice posts on adding children as authorized users. Unfortunately, it nearly always mentioned the risks to parents, neglecting to mention the risk this practice might pose to their children as well. Parents turning to those resources received a partial picture, neglecting some of the major pitfalls of that decision.

Many people replying expressed general, profound frustration about the effects of FICO scores and credit reporting agencies — particularly when something like illness or job loss lay outside their control while heavily driving down their supposed creditworthiness. After one of those three agencies — Equifax — had a massive data breach in 2017, The Verge published an editorial about these generalized grievances and a “broken” system:

Even worse, all this information [on your credit reports] is generally being shared without your consent. The three big credit bureaus — Equifax, TransUnion, and Experian — see their customers as the businesses checking people out, not the people themselves. They’re worried about keeping banks and car dealers happy, but the targets themselves are an afterthought. As a result, even basic inaccuracies can persist for years, bouncing between the three major bureaus. (Convincing credit bureaus that you’re not dead, for instance, is much harder than you think.) There have been a few regulations aimed at fixing that — most notably the Fair Credit Reporting Act — but it’s still an extremely clunky system, and the average consumer has little awareness or control over their own profile.

Yet another element likely driving interest in the Twitter thread about kids as authorized users and credit scores of 800 was that by their nature, FICO and the three credit reporting agencies (Equifax, Experian, and TransUnion) remain highly secretive about their calculations of creditworthiness. Credit card blogger The Points Guy explained:

Credit scores consist of a three-digit number, usually between 300 and 850, designed to represent the likelihood that you’ll repay a loan on time. They’re also a little mysterious and that’s not an accident. The major credit-scoring companies, FICO and VantageScore, keep their formulas secret, so only a handful of people know the exact recipe that’s used to turn your credit history into a credit score.

In fact, it was only in fairly recent years that people had any access whatsoever to their own FICO scores. A 2001 article about FICO scores becoming accessible to borrowers reported that people were finally getting to see their scores — because FICO was selling their own information back to them:

When it comes to getting a mortgage, credit card or insurance policy, most consumers have no clue about the most important number affecting their application: their FICO scores, behind-the-scenes calculations drawn from credit reports.

Designed to predict future consumer behavior, FICO scores regularly make the difference between approval and rejection. And even after a loan or insurance policy is issued, FICO scores sway prices and credit lines, with the lowest rates going to consumers with the highest scores … After 35 years, Fair Isaac is finally emerging from the shadows, trying to leverage its influence on household finances to become more of a household name through an online service that sells people their FICO scores at $12.95 per peek.

On Twitter and in the excerpted articles, it was demonstrated that FICO and the three credit reporting agencies typically did little to enable people to manage their own credit scores — except in cases where they hoped to extract money from them for access to their own personal information.

That also ought to make “advice” from said companies slightly suspect. Lenders are FICO, Equifax, Experian, and TransUnion’s primary customer base. Borrowers are a middling secondary market, and consumer financial woes remained an area of massive profit for those agencies. Encouraging risky behavior or unfettered borrowing did, after all, serve to boost the bottom line of all involved.

Bearing that in mind, credit rating agencies did offer tips on adding children as authorized users to build their credit scores. TransUnion’s blog had an Q&A entry about that very topic:

Q: One tip I’ve heard is that a parent can put a child on their credit card as an authorized user and that can sometimes (with some cards) contribute to a child’s credit history. Is that true? What kind of cards should we be looking for?

A: Adding your child as an authorized user is one way to help them begin building a credit score if you yourself have a good credit. With some credit cards, the entire account history can show up on the authorized user’s credit report, so you’ll want to select a card where you have a good credit history. While there are many different credit scoring models available, the most commonly used scores — FICO 8 and VantageScore 3.0 — factor in authorized user accounts when calculating a score. Determining if an authorized user account is right for you is a personal decision — as the card holder you are responsible for any charges on the card, so be sure that you set some guidelines in advance.

TransUnion cautiously advised the practice “if you yourself have good credit,” stopping short of explaining what they meant by “good credit.” (Is that a 650 credit score? 600? 750?) Their answer also vaguely noted that “some” credit cards allow for “the entire account history” to appear on an authorized user’s own individual credit report, suggesting that activity that took place even before the user was added could be factored into their credit profile. That alone made the advice seem risky for anyone who had ever at any point made a late payment on any card.

Equifax also had a blog, a Q&A about children as authorized users, and advice on its effects on a child’s future credit score:

Even though an authorized user isn’t responsible for the financial obligations on the account, they can be impacted by whether or not the account is paid on time. Since they are considered account holders, any activity on the account that is reported by the creditor to any of the major credit bureaus will appear on the authorized user’s credit reports. If the primary account holder pays as agreed, it can help an authorized user establish or build a positive credit history. If they don’t, however, it can have a negative impact. Depending on the credit scoring model, credit scores may also be impacted.

[…]

Being an authorized user can be one way to establish responsible credit habits. Some parents will add their children as authorized users to help them establish and build a credit history. Some couples will also add each other as authorized users on an account.

But “you are going to inherit the credit of that cardholder” – for better or worse, said Jennifer Cox, Equifax chief client officer, who has worked in the credit card industry for decades. If you are considering becoming an authorized user on someone else’s account, it’s a good idea to discuss their credit situation with them.

As Equifax described here, a level of risk accompanied any reward, and CRAs seemed to consistently frame those risk as related to “responsibility” or “reliability.” But as we pointed out, damage to credit isn’t always related to responsibility (as we also noted on our page about medical bankruptcy rates). By linking chosen traits or behaviors (like responsibility) to the advice, parents were tacitly advised that their best intentions were good enough to protect their child — but unforeseen circumstances never appeared to be mentioned by credit bureaus encouraging the behavior.

Experian too had a Q&A blog post about adding children as authorized users to help the child eventually build credit. It also used words like “responsible” and “reliable,” advising putative authorized users to “ask the primary account holder” about factors like late payments and even suggesting that those same authorized users ask to see a credit report:

Just as joining a responsible credit user’s account can help you, linking yourself with a less reliable cardholder can hurt you. If the cardholder misses a payment or maxes out their card, your credit could be negatively affected. Some credit reporting agencies, including Experian, do not include negative payment history in an authorized user’s credit report. But others may.

Before becoming an authorized user, ask the primary account holder about past late payments, how long they’ve had the account, and how often they use more than 30% of their credit limit. Experts say those with good credit scores use less than that on a regular basis (and those with the best scores stay around 10% or less). To be extra sure you’re making the right call, consider asking if the account holder will let you see their credit report.

Discover’s Credit Resource Center reiterated the same advice in a Q&A format; Discover does, of course, profit more from borrowers using their subprime products, thanks to higher interest rates:

By Becoming an Authorized User, am I Inheriting the Primary Account Holder’s Credit Habits?
Before you consider becoming an authorized user, the first, and most important, thing to look for is whether the primary account holder pays their bills on time. If they do not make timely payments, that gets documented on the credit reports of authorized users. And credit card issuers report late payments to credit bureaus.

So it doesn’t take much to begin to negatively impact your credit score. What’s more, late payments, as bad as they are, are not the only thing that can hurt you. If the account in question has a high utilization rate, that too can weigh heavily on your credit score.

So before signing on to be an authorized user, it’s best to do your own due diligence by evaluating the credit habits of the primary account holder. Otherwise, instead of working to build a positive credit history, you may find yourself achieving the opposite.

Caveats about debt-to-income ratio accompanied tips about not paying bills late when lenders and CRAs gave advice. But as of 2018, the average American household held $38,000 in personal debt, against a median household income of $63,000 the same year. On top of that, only 41 percent of Americans had the ability to pull together $1,000 in case of an emergency as of January 2020, leaving 59 percent lacking sufficient savings to cover that proposed unexpected expense.

In the larger scheme of things, credit reporting agencies and lenders offered a few broad caveats about transference of negative credit history as well as positive, sometimes advising prospective authorized users to credit check their parents. Overwhelmingly, that advice was couched in such a way users would identify themselves as a responsible borrower, and see less risk than they perhaps should in adding a child as an authorized user.

Now let’s go back to the crux of the advice –in which the child wasn’t consulted, and likely couldn’t assess the risk anyway:

Add your kid on as an authorized user and pay the bill on time. By the time that kid hits 18. Boom 800+ credit score for them to succeed in this world.

Although Equifax, Experian, and TransUnion made it look like a safe bet if you considered yourself responsible (as most people do), no one ever mentioned negative credit history acquired due to a car accident, an illness, job loss, or other catastrophe. One of the advice posts mentioned the authorized user in question doing “due diligence” before piggybacking on a card, but the post referenced children under the age of 18 added unwittingly to parents’ credit cards.

As the first commenter observed above, the advice, like nearly all financial advice, works best for those who are already rich. Credit pitfalls were typically related as much to circumstance as responsibility, and only the wealthy maintained the resources to apply the advice to optimal effect. The rest of the population is typically just one unexpected development away from a score drop.

The massively viral piece of well-intentioned advice posits that adding a child to piggyback on a credit card would grant that same child a FICO score of 800 once they were old enough to apply for a credit line of their own (provided the parent paid their bills on time.) Of the little information given out by FICO and CRAs, an absence of credit history would make that score less useful than it might be for a borrower with their own credit score. But more importantly, many timely bill payers could follow the advice before falling on hard times — even a few months of delayed payments could impart a negative rather than positive history to the child, which would help them not at all.



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Bad Credit

How to get a business credit card with bad personal credit

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Dear Business Banter,

I want to start a business, but I have bad credit. What are my options? – James

Dear James,

Although an impressive credit history and high credit scores aren’t required to start a business, they sure help! After all, you may soon want to borrow funds from a financial institution so you can do everything from pay for the costs of a launch to managing ongoing operations.

To appeal to a lender, your past credit history will be relevant. Thankfully, you can overcome the problems associated with bad credit to qualify for a business credit card—and a loan, since that might be necessary too.

Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.

Build up your score

Since your business has yet to begin, you don’t have a business credit profile that can help you qualify for credit products. Therefore, lenders will assess your personal creditworthiness to determine qualification and set terms.

To know what is dragging your credit scores down, pull your credit reports up. You can get a report from each of the three credit reporting agencies—Experian, TransUnion and Equifax—once a year for free from annualcreditreport.com.

The information listed in the sections for trade lines, public record, and credit inquiries of your credit report is all inputted into scoring models, so read your reports carefully. If you spot any inaccuracies, file a dispute with one of the credit reporting agencies. The one you use will notify the other two, and your files will be updated.

To improve your scores (even when the negative data is still being listed):

  • Pay all credit accounts on time. Although late payments hurt credit scores (especially when there are many, or accounts are seriously delinquent), establishing a perfect payment history from this point forward will help mend the damage.
  • Reduce credit card debt. If you have credit cards and they’re maxed out, reduce the balance to well below the credit limit.
  • Open up a credit card. Consider opening a personal credit card. Many credit cards are created specifically for people with bad credit. Once you have it, choose a small bill to charge each month, then pay it off in full and on time.
  • Add utility and cell phone accounts to your report. The more on-time payments you have on your credit report, the better. Experian has a free Boost program where you can add non-credit accounts to your file. Those payments should help give your FICO 8 credit score at least a few extra points.

With this strategy, your credit score will increase over time.

See related: Do I need a business credit score to start a business?

Get a business credit card

Although you can use a personal credit card for your business, it’s better to get one specifically for your company. They offer benefits that are designed to help business owners do everything from handle their enterprise’s expenses to helping with accounting.

Just be aware that these cards remain your personal responsibility. Even if it’s in your business’s name, you will be on the hook for all payments and any outstanding debt.

So, how can you get a business credit card with bad personal credit? When your scores are at least in the “good” range, start looking into the business credit card options that are available. As you’ll see, there are many from which to choose, so give this task plenty of time.

Be aware that some business cards are charge cards while others are credit cards. With a charge card, there is no preset limit, but you’ll need to pony up the entire balance within about 30 days. With a credit card, there is a maximum amount you can charge, but you can pay at least the minimum requested payment and then revolve the rest. Ultimately, you may want one of each.

When your scores are at least in the “good” range, start looking into the business credit card options that are available.

Almost all business cards have rewards programs attached to them, so read over the program’s details and focus on those that you’ll use. For example, if you think traveling will be in your future, concentrate on a card that gives you the best perks for flights, airport amenities, hotels and car rentals.

Many business credit cards offer excellent sign-up bonuses, too, where you would receive a large amount of points, cash or miles after spending a certain amount with the card within a few months of activation.

Some also offer 0 percent APRs for a fixed number of months, which will give you a nice amount of time to pay for your venture’s needs before financing fees are assessed. As long as you pay the debt in full before the real rate begins, you get a free loan! As you use the card, you’ll be racking up rewards.

These programs differ, so make sure it’s a good match. One card may offer an exceptional reward value for restaurant meals, while another gives the most for things like office products.

Finally, prepare for annual fees. Not all cards charge them, but if you get more out of the account by way of perks and rewards, you’ll come out ahead. Choose wisely.

Look into loans

Credit and charge cards tend to be great for short-term financing, while business loans are preferable for big-ticket expenses that you want to pay off over several years.

To get a business loan with the best terms, it’s best to wait until your credit is in decent shape. However, if you must borrow a significant amount of money right away and then pay in equal installment payments, there are startup business loans for bad credit.

Loans with no credit checks still pass through an approval process, but the lender analyzes your assets and income for approval instead of your credit history. If it appears that you can make the payments that are associated with the loan, it should be approved. Other lenders do check credit reports and scores, but the standards for qualification are low.

In either case, loans that are developed for people with bad credit tend to be smaller and come with higher interest rates than those for people who have good credit.

Whichever loan you get, simply pay it off according to the agreement. Assuming the lender furnishes information to the credit reporting agencies (most do, but if you get a “no credit check loan,” ask the lender to be sure), it will help your credit scores rise.

Take these simple steps and you’ll not only repair your bad credit but will have the good credit products for your business!

Bottom line

To qualify for a business credit card (and a business loan), take action to improve your personal credit history.

Shape up your FICO score, identify the right business card for your needs and consider a business loan.

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Bad Credit

Home Equity Loan With Bad Credit: Can It Be Done?

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Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Home equity loans let you turn your equity into cash, which you can use to pay for home improvements, unexpected medical expenses, or any other bills you might be facing.

Generally, lenders require at least a 620 credit score to qualify for a home equity loan. If your score isn’t quite there yet, though, you still have options.

Here’s how you may be able to get a home equity loan with bad credit:

  1. Check your credit and try to improve it
  2. Find out your debt-to-income ratio
  3. Find out how much equity you have
  4. Think about bringing on a cosigner
  5. Shop around for the best rates
  6. Consider alternatives to bad credit home equity loans

1. Check your credit and try to improve it

To start, head to AnnualCreditReport.com and pull your credit. You get one free report from all three credit bureaus per year.

Once you have your credit report, check it for errors and evidence of identity theft, such as accounts you don’t recognize and credit cards that aren’t yours. Reporting these to the credit bureau can help improve your score. So can taking these steps:

  • Pay all your bills on time: Payment history — or your track record of payments — accounts for 35% of your score, so make it a point to pay all of your bills on time, every time.
  • Pay down your debts: Lenders want to see a credit utilization rate of 30% or less — meaning your balances account for 30% or less than your total available credit.
  • Keep credit cards open: How long your accounts have been open impacts 15% of your credit score, so avoid closing accounts — even once you’ve paid them off.
  • Avoid applying for new cards: This will result in hard credit inquiries, which can hurt your score.

Learn More: How Your Credit Score Impacts Mortgage Rates

2. Find out your debt-to-income ratio

Lenders will also consider your debt-to-income ratio (DTI) when you apply for a home equity loan. This indicates how much of your monthly income goes toward paying off debt.

How to calculate DTI: Add up your monthly bills and loan/credit card payments, and divide the total by your monthly income. Multiply that amount by 100.

For example, if you have $2,000 in debt payments and make $6,000 per month, your DTI would be 33% ($2,000 / $6,000 x 100).

Most lenders want a DTI of 43% or lower. A low DTI can help improve your chances of getting a loan, especially if you have a lower credit score, since it indicates less risk for the borrower.

3. Find out how much equity you have

How much equity you have in your home, as well as your loan-to-value ratio, will determine whether you qualify for a home equity loan — and how much you can borrow. To find out yours, you’ll need to get an appraisal, which is a professional evaluation of your home’s value. The national average cost of a home appraisal is $400, according to home remodeling site Fixr.

Once the appraisal is finished, you can calculate your loan-to-value ratio by dividing your outstanding mortgage loan balance by your home’s value.

For example: If you have $100,000 remaining on your home, and the appraisal determines it’s worth $200,000, then you have an LTV of 50% ($100,000 / $200,000). This also means you have 50% equity in the home.

Most lenders will only allow you to have a combined LTV of 85% — meaning your existing loan, plus your new home equity loan can’t equal more than 85% of your home’s value.

In this example, you’d be able to borrow $170,000 (85% of $200,000) across both your initial mortgage loan and your new home equity loan. Since your existing loan still has $100,000 on it, that’d mean you could take out a home equity loan of up to $70,000.

4. Think about bringing on a cosigner

Bringing in a family member or friend with excellent credit to cosign your bad credit loan can help your case, too. If you do go this route, make sure they understand what it means for their finances. Though you may not intend for them to make payments, they’re just as responsible for the loan as you.

Tip: If you fail to repay the loan as agreed, it could hurt the other individual’s credit score or result in collections against both of you. Make sure you’re upfront and transparent about what cosigning your loan may mean for them.

5. Shop around for the best rates

A lower credit score will typically mean a higher interest rate, so it’s incredibly important you shop around and compare your options before moving forward. Get rate quotes from at least three to five lenders, and make sure to compare each loan estimate line by line, as fees and closing costs can vary, too.

Credible makes comparing rates easy. While Credible doesn’t offer rates for home equity loans, you can get quotes for a cash-out refinance — another strategy for tapping your home equity. Get prequalified in just three minutes.

Get the cash you need and the rate you deserve

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Find My Loan
No annoying calls or emails from lenders!

6. Consider alternatives to bad credit home equity loans

A bad credit score can make it hard to get a home equity loan — especially one with a low interest rate. If you’re finding it difficult to qualify for an affordable one, you might consider one of these alternatives:

Cash-out refinance

Cash-out refinances replace your existing mortgage loan with a new, higher balance one. You then get the difference between the two balances in cash.

Find Out: Credit Score Needed to Refinance Your Home

Personal loans

Personal loans offer fast funding, and you don’t need collateral either. Rates can be a bit higher than on home equity loans and refinances, though, so it’s even more important to shop around. A tool like Credible can help here.

Check Out: Home Equity Loan or Personal Loan: How to Choose the Best Option

Compare multiple lenders

If you have bad credit, there are still ways to tap your home equity or borrow cash if you need it. Head to Credible to see what personal loan options and mortgage refinance rates you might qualify for. With Credible, you can easily compare prequalified rates from all of our partner lenders without leaving our platform.

About the author

Aly J. Yale

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and a contributor to Credible. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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Bad Credit

A Look Back At Housing 2020: Rental Housing Gets Riskier

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According to the American Housing Survey cited in a recent article, there are about 48 million rental housing units in the United States ranging from single-family homes to large multifamily apartment complexes. Of those 48 million units about 23 million are owned by individuals, according to a recent Rental Housing Finance Survey; that’s more than half of the occupied units in the country. Yet private rental housing providers have been under relentless attack in recent years increasing risks and costs. This has worsened in 2020 as I have pointed out. More risk means fewer housing units and higher prices, not a good outlook for the future.

Any business based on renting assets is based on risk. Think about the last time you went bowling. When you rent the shoes, the person behind the counter often will hold a driver’s license? Why? It’s a way of offsetting the risk that you’ll go home with the shoes either on purpose or accidentally. Nobody wants to deal with a lost driver’s license. Offsetting this risk has absolutely nothing to do with you or your trustworthiness; it is uniformly applied and routine.

Housing providers have to similarly offset the risk of allowing a stranger occupy their private property. There are several ways of doing this, including using credit checks. But lately, politicians are beginning to eliminate the credit check from the tools that housing providers can use to offset risk. Minneapolis for example has eliminated credit checks arguing that they are a “barrier” to housing.

Is race a factor in bad credit and thus a barrier to people of color to get housing? The fact is, yes, African American people have more credit issues. But would eliminating credit checks help them? The answer is, “No.”

An article in the Washington Post, “Credit scores are supposed to be race-neutral. That’s impossible,” is emblematic of how this issue plays among the public and policy makers. The author says two contradictory things. First,

“This would lead one to think that credit-score calculations can’t be biased. But factors that are included or excluded in the algorithms used to create a credit score can have the same effect as lending decisions made by prejudiced White loan officers.”

Then she writes,

“One quick way to impact your credit history is a court-ordered judgment. And Black borrowers are more likely to fare badly when taken to court by their creditors. Debt-collection lawsuits that end in default judgments also disproportionately go against Blacks, according to a 2020 Pew Charitable Trusts report.”

Logically, the right way to state this is that credit measures are biased against people who have default judgments against them, and African Americans have higher rates of defaults. Then the next question would be, “Why?” The most obvious answer is the right one, poverty is disproportionately concentrated among people of color.

But eliminating credit checks for housing won’t help that problem. If a housing provider is unable to evaluate risk based on past financial performance her only option will be to raise rents and deposit amounts in case there is a problem; that extra cash would provide a buffer if a resident stops paying rent. This won’t help anyone with less money. What’s the response to that? Ban rent increases by imposing rent control! That’s a bad idea too and won’t help either.

The answer is to figure out how people who have less money and therefore have more issues making ends meet can solve that problem and improve their credit scores. The author of the Washington Post article makes a sensible suggestion: include steady rent payments in credit scores. Some housing providers do, and it’s a great idea. But it is a positive one that actually helps the family; banning quantitative measures of past financial performance doesn’t.

The danger that unfolded in 2020 is that justifiable outrage about racism could lead to interventions that don’t address poverty and it’s negative consequences like default judgments but elimination of accepted measures of those consequences. Eliminating the evidence of poverty – struggling to pay bills – doesn’t help pay the bills! At best, these kinds of measures sweep the problem under the rug ensuring higher rents and making housing a risky business only big corporations will be able to do.

The answer is to address the broader underlying issues of poverty and increasing housing production. When there is more supply of housing providers compete with providers for residents and will be forced to bargain with potential residents, even those with dings or dents or completely destroyed credit. Housing abundance solves a housing problem while eliminating measure of risk only makes that risk higher and actually creates a housing problem.

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