No credit profile? With a few steps, create or rebuild a credit history
Millions of Americans are “credit invisible.” They do not have enough information in their credit reports to generate a score. But with a few straightforward steps, it’s possible to create or reinstate a dormant or nonexistent credit history.According to a report from the Consumer Financial Protection Bureau (CFPB), 1 in 10 adults, or 26 million, lack a credit history with a national consumer reporting bureau, such as Equifax, Experian and TransUnion. Another 19 million are “unscored,” meaning their credit records cannot produce a score based on widely used credit scoring models because they lack a sufficient amount of credit history or their records include too much “stale,” or out-of-date, information.
Falling into one of these categories can have a profound effect on consumers’ lives. Credit reports track an individual’s credit history, with information about such factors as bank, car and student loans, mortgages and payment track record. Credit scorers, such as FICO, use that data to determine how reliable a risk a consumer is and sum it up in a three-digit score, ranging from 300 to 850. That number affects your ability to get a mortgage, credit card, car – sometimes even a job – as well as the interest rate you’re charged on loans.
“It’s imperative that consumers get on the credit map,” says Dara Duguay, executive director of CreditBuilders Alliance. “Otherwise they’ll never be able to get a loan.”
The problem is even worse for those groups that, according to the CFPB, are particularly more likely to be credit invisible or unscored. For example, about 15 percent of African-American and Hispanic consumers are credit invisibles, compared to 9 percent of whites, according to the CFPB. And close to 30 percent of consumers in low-income neighborhoods are credit invisible and 15 percent are unscored versus 4 percent invisible and 5 percent unscored in upper-income areas. Immigrants also are more likely to be credit challenged, Duguay says.
Steps to create a credit profile
There are easy ways to establish a credit history. “The long-standing myth is to get credit you must have credit,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling (NFCC). “But everybody has to start somewhere.”
Here are some options:
1. Apply for a secured credit card.
You don’t need a credit score to apply for one of these babies, and they can help you establish a credit history. A secured card requires you to put down a refundable deposit of, say, $300 to $50, which serves as your credit line. Basically, you’re borrowing against your own money, and if you default on payments, the lender will tap your deposit for repayment. But if you use the card wisely by charging small items and repaying the account in full by the due date, you will start building a positive credit history. In about six months, you can achieve a credit score in the 600s, Duguay says.
Don’t assume that all secured cards report your account activity to the credit bureaus; call and ask before you apply. Also, even though the cards are secured, interest rates and fees may be high. Capital One’s Secured Mastercard, for example, charges a variable rate of 24.99 percent. So it’s best to shop around for the best offer and to always pay off the balance every month on time to avoid incurring interest or late payment fees.
And for the record, prepaid cards are a different product that typically don’t report to the credit bureaus.
2. Get yourself added to an existing credit card account.
Another easy way to build a credit profile is to seek out a loved one or family member with a long-standing, positive credit history and ask to be added to his or her card as an authorized user, says Tracy Becker, president of North Shore Advisory. The older the person’s card account, the better, she says, because the information dating back to when the credit card was opened will be reported on the authorized user’s credit file. One exception, says Becker, is American Express, which only sends data to the credit bureaus from the date the authorized user was added to the account. It should take about three months for the information to make an impact on your credit history, Becker says.
The long-standing myth is to get credit you must have credit. But everybody has to start somewhere.
|\u2014 Bruce McClary|
National Foundation for Credit Counseling
As an authorized user, a card will be issued in your name, but you don’t have to use it to generate a credit history. In fact, it’s best to just keep the card in a drawer and not use it in order to avoid any conflict with the primary cardholder, who is ultimately responsible for all charges on the card. After all, this person is doing you a huge favor just by lending you their credit history.
After several months, check your credit score (a good place to get a free FICO score is at Discover Scorecard). Once your credit score reaches a comfortable point, say 670 to 740, then it’s time to apply for a card of your own. Once approved, only then should you ask to be removed as an authorized user as you’ll need that borrowed credit history to qualify for the new card.
3. Join a credit union or community bank.
You could join a local credit union and try to take out a small signature loan or credit-builder loan. “They’re more user-friendly than the big banks typically and you can talk to a real person,” says Anderson. Because credit unions usually report to the credit reporting agencies, you can use that loan to build a credit history.
With credit-builder loans, the financial institution places your “loan” money in an interest-bearing savings account. As you make payments, that activity is reported to the credit bureaus. Once you have “repaid” the loan, it is only then that you get the money. This way, there is no risk to the financial institution.
Another alternative: passbook or certificate of deposit loans, in which your bank allows you to use your savings or CD account as collateral for a loan. In some cases, you can borrow 100 percent of the amount in your account; in others, you may only be allowed to “borrow” 85 to 90 percent of the amount you have saved. You pay an origination fee and interest, which is usually higher than what you earn on the account. During the loan period, you won’t have access to the money in the account until the end of the loan, but you continue to earn interest on it.
4. Apply for short-term, high-interest cards or loans.
You may be able to get a loan for an automobile, particularly if it’s a used car, and start establishing a credit history that way, says Mark Anderson, a partner with Anderson Ogilvy & Brewer, which represents consumers who have trouble with their credit reports. Odds are, however, that the loan interest rate may be prohibitive, but if you can pay off the loan in a short amount of time, it may be worth the expense.
Another possibility: You may be able to qualify for a gas credit card or a retail card, as those cards tend to come with smaller credit lines and higher APRs. To avoid paying interest charges, all you have to do is pay off the entire balance by the due date every month.
At the same time, watch out for predatory lenders. “Make sure you’re dealing with an established lender with a good track record,” says McClary. He advises checking the company with the Consumer Financial Protection Bureau, which maintains a publicly accessible database of consumer complaints about financial service providers such as lenders and debt collection companies; the Better Business Bureau; and your state’s attorney general’s office, for complaints.
5. Pay your bills on time.
Of course, you can undermine all your best efforts if you don’t make timely payments, even if the bills you’re paying don’t report to the credit bureaus, as debts that end up in collections end up being reported to the credit bureaus.
“Any damaging activity will have a damaging effect on your record,” says McClary.
Ultimately, however, with several simple moves, conscientious bill payment and patience you should be able to build a solid credit history.