If you have either no credit or a very limited history of using it, here’s what to do to obtain a credit score that will open doors currently closed to you.
A credit score is an increasingly popular way for others to gauge your financial health. Some may purposefully choose to stay off of the credit score radar and pay cash for everything. But most of us want to have a credit score that will allow us to do the things we want to do at an affordable price.
To be sure, “cash is king,” but not when it comes to applying for and receiving credit when you need it. Credit reports also play a role when it comes to renting a home, getting a promotion at work and even the rate you pay for auto insurance.
So, for all those of my readers out there who have either no credit or very limited history of using it, here’s what you can do to obtain a credit score that will open doors currently closed to you.
See related: Why is a credit score important?
Why don’t I have a credit score?
There are various answers to this question, but the most common ones are that you are new to credit, new to America or have avoided credit because your experience has been that the system is stacked against you.
This could mean you are young and have not had a reason to try to access credit before. You could also be an immigrant who either had no credit at home or whose foreign credit file didn’t come over with you.
It could mean that you are a member of a minority group who was only able to access high interest rate loans, like payday loans, and were burned from the experience. Or, you may just enjoy the feeling of paying with a roll of cash while lesser mortals use plastic.
None of these are bad things, but they will keep you from having a credit score and living a fully successful financial life in these United States.
Credit scores are mainly derived from information in your credit reports. These reports get their information from lenders who “report” five major aspects of your borrowing experience with them:
- Your payment history
- How much of your available credit you use
- What types of credit you have experience with
- How long you have been using credit products
- How recently you have applied for new credit
Each of these categories make up the main components of your dealings with their products and of your credit score.
If you have no credit, is your score zero?
Credit scores fall in a range of 300 to 850. There is no “zero” credit score. VantageScore recently provided some data on the U.S. population according to its scoring scale, with the shocking result that almost 25% of Americans are in less than “fair” shape. Using this scale, you can estimate your place in the credit pecking order:
- Excellent: The top 22.1% of the population is in this category, with scores ranging from 781 to 850.
- Great: 18.1% of the population. Great scores range from 721 to 780.
- Good: 17.8% of the population. Good scores range from 661 to 720.
- Fair: 13.6% of the population. Fair scores range from 601 to 660.
- Unfavorable: 19.8% of the population. Unfavorable scores range from 500 to 600.
- Deficient (formerly called high risk): 4.6% of the population. Deficient scores range from 300 to 499.
Practically speaking, few consumers have a score lower than about 500. If you are just starting, or starting over, you should know that 300 is not the starting point. That is simply the lowest point in the range.
Is no credit better than bad credit?
They are the same from a lending standpoint. This means that if you have no credit and apply you may very well be denied, which is the same result that can happen if your credit is bad.
However, from a scoring standpoint, no credit is easier to fix than bad credit. If your existing score is low, it’s because you have made some mistakes that have caused your score to dip.
Mistakes like late or even missed payments and maxing out a credit card will cost you big in your credit score. Negative entries remain on your credit report for seven years with the exception of the big daddy of negatives (chapter 7 bankruptcy), which stays out there for 10 years.
While you can certainly recover from these actions by paying your bills on time and as agreed and reducing your credit balances, these actions take time. On the plus side, positive accounts will stay on your credit reports for a long, long 10 years after you close them. This helps boost your score for years to come.
For those of you with no credit, you have no negative history to overcome. All your new positive information will show up undiluted and your score will build more quickly than someone digging out of a negative credit hole.
How to get a credit score
Until recently the only way to get a score was to access credit in some way, but now there are other ways. I will cover these at the end of this column.
Sign up for a credit card
Traditionally, when it comes to credit cards, retail and gas cards are usually fairly easy to qualify for and can be a good start for those new to credit.
While having credit accounts in your name is good, there are other steps you can take. One tried-and-true method is to be added to a parent’s or another person’s account as an authorized user. Being added as an authorized user means that while you are not responsible for the payments on the account to the creditor, you still get credit for the positive payments on the account. This does not mean you should go out and charge a bunch of stuff on your dad’s credit card – I’m sure he would have something to say about that.
You might also look into obtaining a secured credit card. These cards are backed by a deposit with the lender. If payments are not made on time, the lender can take the deposit and not be out anything. That would of course defeat the purpose of building credit. If you choose to go this route, be sure that the card’s activity will be reported to the three credit bureaus.
Apply for a passbook loan
Along the same lines is a passbook or first step loan. This is a loan that, again, is backed by your own funds (and you will want to be sure that it will be reported).
One advantage of this method is that it gives you the chance to increase your credit mix. The credit mix scoring factor is not nearly as important as payment history and credit utilization in the scoring matrix, but it does count. A passbook loan would be considered “installment” credit, where credit cards are “revolving” credit.
Add positive data to your credit report
There are also various products on the market to help your score by looking at nontraditional information. Called consumer-supplied data, you can now have information about your positive financial habits posted to your credit reports.
Experian Boost allows you to have on-time cellphone and utility payments made a part of your Experian credit report. Also, FICO has released UltraFICO, which allows banking data to be taken into account. For renters, if your rent is not reported (a very common scenario), you can check into using Experian RentBureau.
While these products will only impact the FICO score you receive through Experian, they are a good start for someone looking to establish credit.
See related: How to build credit without a credit card
No matter how you start building your credit, be sure to put your best foot forward from the beginning. This means paying your bills on time, every time, and watching how much of your available credit you access in one billing cycle.
And only apply for credit that you need and can be fairly certain you will qualify for. Creditcards.com has some great tools such as CardMatch to help you know in advance if you’ll qualify. A score you can be proud of will be the result.
Remember to keep track of your score!