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A handful of companies are shaking up the system by offering credit cards to those with no credit histories.
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  • Your credit score is critical in determining whether you will be able to do things such as rent an apartment, buy a house or apply for insurance.
  • But one in 10 people lack a credit history — often because they're too young or have simply avoided going into debt.
  • Some evidence shows the credit system is discriminatory, with black, Hispanic and low-income consumers much more likely to be "credit invisible."
  • New companies are stepping up to offer credit cards to those without credit histories.

Your credit score is a snapshot of your history, showing how you've handled borrowing money in the past so lenders can determine if they feel comfortable lending to you in the present.

But that can make life difficult if you're one of the 26 million Americans — about one in 10 people — who the Credit Financial Protection Bureau labels "credit invisible" because of a lack of credit history.

This brings to light a financial catch-22: You need credit to establish your credit history, but you can't get credit without a credit history.

But there are now a handful of companies that are banking on the idea that such a heavy reliance on this one number — one's credit score — is due for an update. One of them is Petal, which is breaking new ground by offering a zero-fee credit card to people with no credit history.

Your credit score is certainly important, but it's far from the only relevant factor. Making sweeping generalizations about those 26 million people without a credit history has created a large, underserved market.

You need credit to establish your credit history.
Matt Cardy/Getty

Plenty of completely reliable people lack a credit history for any number of reasons: Maybe they have been serving overseas, have diligently avoided going into debt or are simply young enough that they haven't had a need for credit yet. Most of these people would likely make excellent customers for credit card issuers, but that's not apparent from just a credit score.

That's why Petal has started using what it's calling "cashflow underwriting," a process that uses data science to isolate metrics beyond just your history — like your current income and monthly spending — to determine if you're creditworthy, allowing the credit card provider to gauge potential customers based on the present and future instead of just the past.

That might sound simple, but the implications could be pretty profound.

Beyond the business case for identifying profitable consumers being ignored by the rest of the industry, there's ample evidence that the current system is discriminatory. The same CFPB study found that black or Hispanic consumers were 66.7% more likely to be credit invisible than whites, and that living in a low-income neighborhood made you more than seven times more likely to not have a credit score. Another CFPB study revealed that consumers in higher-income areas were 30% more likely to start their credit history with a credit card, and more than twice as likely to be able to establish a credit history by getting someone to co-sign for them.

And all of this can cost you. The additional interest costs of lacking a good credit score can cost you up to hundreds of thousands over the course of your lifetime, according to

Petal is just one of several companies looking to make credit more accessible, with other players like Deserve and Kabbage demonstrating that data science could be paving the way to a lending industry that is more open and fair. Whether or not the new model will succeed in the long term remains an open question, but the early results for Petal appear to be positive. Since the launch of their initial invitation-only beta product, Petal has seen its waitlist swell into the tens of thousands, and the company secured $13 million in new investments in early January, TechCrunch reported.

Click through to see the seven best types of loans for people with bad to no credit.
