There are a lot of great ways that AI is improving personal finance. One survey found that 47% of Americans are using AI to improve their finances in one way or another. Some are using generative AI tools to manage their finances and others are using AI to get financial advice.
However, one benefit that many people haven’t talked as much about is using AI to get tradelines. These can help people with limited credit build it more, which will help them get a loan, credit card or apartment. This is just one of the many ways that AI is helping the financial industry and its customers.
A growing number of people are using AI to find new tradelines, which is going to be a great deal for people struggling with poor credit. This touches on one of the things that the NCRC and Fintechs covered in their joint letter on the disruptive impact of AI in lending.
What Are Tradelines and How Do They Work?
Tradelines are essentially the credit accounts listed on a person’s credit report. These include credit cards, mortgages, car loans, and other forms of debt reported to credit bureaus. Each tradeline contains details such as the type of account, the account holder’s payment history, the amount of credit available, and the current balance. For individuals with new or limited credit histories, tradelines can be a tool to enhance their credit profile by adding accounts with positive histories. One common method is to become an authorized user on an existing tradeline, such as a family member’s credit card. When added as an authorized user, the positive payment history of that account is reflected on the new user’s credit report, boosting their credit score over time.
Building a solid credit history is crucial for securing financial opportunities, whether obtaining loans, renting an apartment, or getting favorable interest rates. Establishing a strong credit profile can be challenging for new or limited credit users, who may need more credit history for lenders to evaluate. Tradelines offer a potential solution for these individuals by allowing them to add a positive credit history to their credit reports. Building a solid credit profile doesn’t always require opening new accounts; for some, adding a $50 tradeline can be an affordable way to boost their credit score and establish a stronger credit history. We will explore how tradelines can help new or limited credit users build credit, giving them the foundation needed for future financial success.
AI technology can be great for finding and using resources to improve credit, including tradelines. US Money published an article on this topic back in May, which covers some of the benefits listed below.
1. Improving Credit Scores with Positive Payment History
Payment history is one of the most significant factors in determining a person’s credit score. Lenders want to see that borrowers have a track record of making timely payments, which suggests they are responsible with credit. For someone with a limited credit history, their credit score might be low simply because they haven’t had the chance to demonstrate good payment habits. By leveraging tradelines, individuals can benefit from the positive payment history of another account, which can lead to an immediate improvement in their credit score. Consistent, on-time payments reflected in a tradeline help establish a positive credit history, even for those new to the credit world. This method allows individuals to build credit more quickly than by opening new accounts independently, which can take longer to reflect positive payment behavior. They use AI tools, which is an example of how AI can make the financing process more equitable.
2. Boosting Credit Utilization Ratios
Another critical factor in determining credit scores is the credit utilization ratio, which measures how much of a person’s available credit is being used. A lower credit utilization ratio is generally better, as it indicates that the person is not overly reliant on credit and is managing their borrowing responsibly. For new or limited credit users, having only one or two accounts may result in a higher credit utilization ratio, especially if they use a significant portion of their available credit. Individuals can reduce their overall credit utilization ratio by adding a tradeline with a high credit limit and a low balance. This reduction can positively impact their credit score, making them appear more financially responsible to lenders. Managing credit effectively is a key component of building and maintaining good credit over time.
3. Enhancing Credit Mix for a Balanced Profile
Credit bureaus also consider the variety of credit accounts a person holds when calculating their credit score. A diverse mix of credit types—credit cards, installment loans, and mortgages—demonstrates to lenders that the borrower can manage different kinds of credit responsibly. For individuals who are just starting to build their credit, their credit mix may be limited, preventing them from achieving a higher credit score. Tradelines offer a way to enhance the credit mix without opening new accounts directly. For example, if someone only has a credit card, being added to a tradeline associated with an installment loan can improve their credit mix. This diversity can help strengthen their credit profile, making them more attractive to potential lenders.
4. Building Credit Without Taking on New Debt
One of the challenges for individuals with limited credit is that they may feel pressured to take on new debt to establish their credit history. Opening multiple new accounts or taking out loans can be risky, especially if they are not in a financial position to manage additional debt. Tradelines offer a solution that allows people to build credit without incurring new debt. By becoming an authorized user on a tradeline with a positive history, they can benefit from that account’s credit without taking on the responsibility of making payments or managing a loan. This approach allows new credit users to improve their credit scores in a low-risk way, avoiding the potential pitfalls of overextending themselves financially.
5. The Role of Tradelines in Establishing Credit for Young Adults
Establishing credit can be particularly challenging for young adults who are just starting their financial journey. Many have not yet had the opportunity to take out loans or apply for credit cards, leaving them with little to no credit history. Tradelines allow young adults to build credit early by becoming authorized users on a parent’s or guardian’s account. This arrangement helps them establish a positive credit record before applying for credit products. As young adults begin to make their own financial decisions—such as applying for a car loan or renting an apartment—having an established credit history through tradelines can improve their chances of approval and better terms. Tradelines are a valuable stepping stone for young adults to build financial independence while maintaining a strong credit profile.
Tradelines offer new or limited credit users a valuable opportunity to build their credit profiles and improve their financial standing. We will explore how leveraging positive credit accounts can help boost credit scores, enhance credit utilization ratios, and diversify credit mixes without taking on additional debt. For young adults and those with limited credit history, tradelines effectively establish a solid foundation for future financial decisions. However, the benefits of tradelines must be paired with responsible credit use to ensure lasting financial health. By approaching credit building thoughtfully and strategically, individuals can use tradelines to achieve better credit outcomes and secure greater financial opportunities in the future.
