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Banks to offer credit cards to people without credit scores

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It will soon be possible to get a credit card even if you don't have a credit score.

As early as this fall, banks such as JPMorgan Chase, Wells Fargo and U.S. Bancorp will launch a collective pilot program that factors in data from applicants' savings and checking accounts to boost their chances of getting a credit card, the Wall Street Journal reported.

The program will include data from across banks and is aimed at helping those who are financially responsible but haven't been able to build credit apply and get credit cards, signaling a major shift in access that could help millions of American adults establish and boost credit.

"It can definitely be a game changer for those that perhaps haven't been able to be afforded the opportunity to extend credit previously," said Greg Giardino, a certified financial planner and financial advisor at J.M. Franklin & Company in Tarrytown, New York. "I think it's a great idea."

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What to know about credit scores

A credit score is basically an assessment of risk that financial institutions use to determine how to lend to consumers. Without a credit score, it can be difficult to access certain things such as credit cards and bank loans, and lenders won't give those borrowers as favorable terms.

People who only pay for things with debit cards or cash or are new to the U.S. often don't have credit scores and may rely on things such as payday loans for credit.

There are about 53 million U.S. adults who do not have traditional credit scores, according to Fair Isaac Corp., creator of the FICO metric. Of those, Black and Hispanic adults are more likely than their white or Asian counterparts to not have a traditional credit score, according to a 2015 report from the Consumer Financial Protection Bureau.

A FICO credit score is calculated using factors such as payment history, total debt, types of credit, new credit and credit duration. It does not consider income, savings, utility bills, debit transaction or your job status.

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"There's always been a little bit of a catch-22 in the way the system has worked," said Rutger van Faassen, head of product & market strategy for FBX at Informa Financial Intelligence. "You have to have a good credit score to get credit, right?"

He added this is also an issue for immigrants, and one he's faced — when he moved to the U.S. from the Netherlands 15 years ago, he nearly had to start over even though he had established credit in another country.

Of course, there are some ways to build credit without having a credit card, such as using a credit builder, using a service that includes rent on a credit report or by paying installment loans (student debt, auto loan or mortgage) on time. But, generally having and effectively using a credit card is the best way to build solid credit over time.

Credit cards can be a valuable financial tool

A credit card — if used correctly — can be an important and helpful financial tool, according to Giardino.

For one, a credit statement can be helpful for budgeting as it creates an easy reference point for how you're spending, he said. It can also help those that have limited cash flow pay for essentials when they need them instead of waiting for a paycheck.

And, many cards come with perks that give extra points or cash back for certain purchases.

"That can be really helpful and meaningful," said Giardino.  

In addition, using a credit card correctly — meaning paying it in full and on time every month — will build your credit score. Having a solid credit score can save consumers in the long run if they take on any other loans.

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"Car loans, mortgages, any type of borrowing you can think about has a lot to do with that score," Lawrence Sprung, CFP, founder and wealth advisor at Mitlin Financial in Hauppauge, New York.

Having a good credit score, generally 670 or higher, could save a borrower thousands of dollars over the lifetime of the loan and repayment, said Sprung.

That's because people with better credit scores are seen as less risky to lend to and given better terms, such as lower interest rates, when they borrow.

But they also come with risks

Of course, there are also pitfalls associated with credit cards, and if not used effectively, they can be damaging to one's credit score.

If someone overspends and can't pay off the full statement balance or pays their bill late, high interest will accrue and dig them deeper into debt.

Banks and other financial institutions should help make sure that people getting credit cards for the first time are using them wisely, according to Sprung.

"Whether you have a credit score or not, it's important to have that educational component," he said, adding that this is especially important as those who don't have traditional credit scores but want credit cards will have to have banking relationships.

This also means there's a chance for banks to encourage the under banked or unbanked to establish a relationship with them, he said.

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