Trying to get credit when you have no credit history is a catch-22. Lenders rely on credit reports to assess their risk and many aren’t willing to lend to borrowers without enough history to generate a score. We usually assume that this problem only affects young borrowers, so you might be surprised to know that 1 in 5 Americans have no credit score.
Approximately 26 million Americans are “credit invisible” meaning they have no established credit with any of the major reporting agencies. Another 19 million Americans are considered “unscorable” which means they didn’t have enough credit for a score or their credit has been inactive too long to be scored.
There are many ways to build your credit score from scratch. These tips will help you open new accounts and gradually build your credit in a way that will set you up for success in the future.
But first, a brief history lesson about predatory credit card lending. It wasn’t always so difficult for young people without credit to get credit cards or loans.
|The Credit Card Act of 2009|
|Before 2009 credit card companies frequently marketed their products on college campuses. It was not uncommon for lenders to set up tables in student unions and quads and approve students for credit cards on the spot. Unfortunately, the result was several generations of borrowers who overextended themselves before they had reached 21 years of age. |
The Credit Card Act of 2009, sometimes called the Credit Card Bill of Rights, protects consumers from predatory lending practices but in turn, has led to more stringent requirements for new borrowers. It is estimated that these reforms have saved consumers more than $16 billion.
The reforms prohibit lenders from targeting young borrowers and also require credit card companies to have transparency to prevent back-end pricing, interest rate hikes and excessive fees which helps new and experienced borrowers of all ages.
10 WAYS TO BUILD CREDIT WHEN YOU HAVE NONE
- Apply for a secured-credit card at a bank. A small deposit, usually under $1,000 will be required to secure the card. Your credit limit will be the amount that you deposited. Using a secured card for small purchases and paying your bill on time will help you prove your creditworthiness.
- Get a store card. Many retailers have branded cards that can be used to purchase goods at their stores and online. These are often available in small amounts to consumers with no credit history. If you are able to get a store card, use it, and pay off the balance each month. You should never spend more on a store card than you can afford to pay for up front. Make sure the store reports to the credit bureaus so that your payment history helps to build your credit.
- Get a student credit card. These cards are designed for young borrowers and can be a way of building a credit history. These cards tend to have low limits and high-interest rates, but unlike secured cards don’t require a deposit.
- Become an authorized user on another person’s credit card. If you know someone – often a parent or close relative – with a good credit history who is willing to make you an authorized user on their card, your borrowing can help establish your credit credentials even though the primary cardholder is obligated to make the payments. If establishing a credit history is the goal, check with the card issuer to make sure that your activity on the card is reported to a credit bureau.
- Find a co-signer. A cosigner is usually a family member or friend with a good credit score who is willing to cosign a loan. You are still responsible for repaying the borrowed money, but if you fail to pay the cosigner will be held responsible and it will damage both of your credit ratings.
- Get a credit-builder loan. This is a loan used specifically to build a credit score. The lender will put the money you borrow into an account, and you’ll make payments on the money until the full amount is paid. The lender will notify the credit-rating bureaus as you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning your credit score. Credit unions and community banks are often the best places to check for this sort of loan.
- Report rent and utilities payments to credit bureaus. Some landlords will report our rent to the credit bureaus on your behalf. If they do not, you can ask a rent reporting service to do it for you. Paying rent and utility bills on time will build your credit but you may need to ask your utility providers if they report to the credit bureaus.
- Always pay on-time. This is the cardinal rule of credit management. It is the most important factor in calculating your score. If possible set up autopay so that you never miss a payment. If you do miss a payment, try to pay it before your creditor reports it to the bureau, usually within 30 days. If you are 90 or more days late your account could be turned over to a collection agency and result in a derogatory mark.
- Don’t go on a spending spree. You should aim to spend 35% or less of your available credit and any given time. This will keep your utilization low which has a positive impact on your score.
- Don’t get too many credit cards. It is a good idea to start one credit card and use it responsibly for at least 6 months before getting another card. Also, do not apply for multiple credit cards at the same time, it can send a signal that you are desperate and will also add hard credit inquiries to your report. Instead, focus on having a healthy mix on your credit report.
I have a credit card. Why do I still not have a credit score?
There are several reasons that someone with a credit card may not have a credit score. If you have a “thin credit file” with 4 or fewer accounts the bureaus can’t calculate an accurate score. You may also be unscorable if you haven’t used the account on your credit report in a very long time. Accounts that haven’t been used in several years are considered inactive and are no longer calculated in your score. If you have 4 or more active accounts make sure that your creditors are reporting regularly to the credit bureaus.
BUILDING A GOOD CREDIT MIX
Having accounts in each of these categories will demonstrate that you are capable of managing different types of credit.
- Store Credit Card
- Bank Issued Credit Card
- Utility Bills and Apartment Lease
- Personal Loan or Car Payment
Following these good credit-building habits can help you start your credit journey out on the right foot. A diverse credit report and a strong history of on-time payments can typically help you establish your score in 6 to 12 months.
Once you have a score you’ll be able to apply for more sophisticated types of credit and improve your score so that you’ll have access to the best interest rates and offers on future borrowing.