Insufficient Credit: What Steps To Take To Build Your Credit
If you have never taken out a loan, used a credit card, or paid a mortgage, or used any other form of credit, then you might be "credit invisible" or "unscorable" -- meaning you have no (or limited) credit history.
Your creditworthiness is based on your credit score, a three-digit number that tells lenders what kind of risk you pose as a borrower. The average consumer has multiple credit scores, but the one most commonly used is your FICO® score.
Your FICO® score is a three-digit number that ranges from 300 to 850 and is generated by information provided to the three major credit bureaus: Experian, Equifax, and TransUnion. Your credit score is determined by your payment history, credit utilization, credit history length, new credit, and mix of credit. A good credit score can help you borrow loans and lines of credit with lower interest rates and higher borrowing limits.
There are a few situations that may result in a borrower being "unscorable" or "credit invisible." Consumers who have no credit history, close a credit account after paying it off, or don't have an active account in the previous six months won't generate a credit score.
Why Is Having Credit History So Important?
Most individuals use credit in some capacity: shopping online or making store purchases with a credit card or taking out a loan such as an auto loan or student loan. While it may have been possible in the past, these days using a credit card is practically a necessity.
Having established credit history is important for a number of reasons:
- Longer credit history with on-time payment generates a good credit score
- Many landlords conduct a credit check to determine your reliability as a tenant (if you are renting an apartment or home)
- Utility and cable companies check your credit to determine if you need a security deposit
- Employers may check your credit history before deciding whether or not they will offer you a job
- You can qualify for lower rates, better terms, and higher amounts on loans and lines of credit (more on that in a second)
What Happens If I Don't Have An Established Credit History?
Even if you don't have any debts, not having any discernable credit history is treated by lenders as though you have bad credit. (After all, lenders need to know if a potential borrower will make on-time payments or default on a loan.)
Without positive, established credit history, lenders will consider you a high-risk borrower and you will probably end up facing some difficult consequences in the future:
- You will have difficulty qualifying for lower interest rates
- You may not be able to qualify for an auto loan, mortgage, or credit card -- and if you do, they will probably come with high interest rates
- You will not be able to get high amounts on loans and lines of credit
- You may have to put down a security deposit when renting a home or apartment
Steps To Take To Build Credit
Not having any established credit history isn't as bad as you think. While borrowers with bad credit may have a harder time rebuilding their credit due to multiple negative marks, having no credit history means you can only go up.
With the right tricks and techniques, it can take around one to six months to start building up enough data to generate positive credit history by using credit and making full payments on-time.
The result? You will eventually be able to qualify for better loans, credit cards, and bypass security deposits when renting an apartment or home.
So how do you start building your credit? Below, we list some techniques and tips to begin your credit journey:
- If you do have credit accounts, check to see if your personal information is correct. Many times an individual may have applied for credit under a different name (example: using or leaving out a middle initial or applying under a nickname), resulting in different credit files or being mistaken for another person with a similar name. As a rule of thumb, make sure you always apply with the same name and correct address and Social Security number. Banks, insurance companies, and other lenders may also have entered your personal information incorrectly, resulting in your credit history showing up as insufficient. It may also be a case in which creditors did not report your information to the three major credit bureaus (Experian, Equifax, and TransUnion). While most creditors will report your activity to the bureaus, not every creditor is required to do so; in this case, you can ask your creditors to report your information (including your cell phone provider, cable company, gas provider, or electric company) or change accounts to a different creditor.
- Apply for a secured credit card. It's difficult to receive loans and lines of credit when you're building your credit from scratch. A secured credit card is a type of credit card that is backed by an upfront cash deposit -- a small amount (around $500) that is usually the same as your credit limit. This card can be used for purchases the same way as a credit card. If you fail to pay your monthly bill, your bank or lender will use the deposit to cover the amount. Making on-time payments with your credit card establishes positive credit history. You can avoid incurring interest by making full payments rather than partial payments. Secured credit cards are a temporary building block for your credit. Once you have a solid credit score, you can close the account, receive your full deposit, and upgrade to an unsecured credit card with lower interest, higher limits, and rewards. (Note: be sure to apply for a secured card that reports to the credit bureaus.) An alternative option to a secured credit card is to open a student card from a university or a store card from a retailer or gas station, which usually doesn't require any established credit history. Ask the store or retailer to report your activity to the bureaus. Like a secured credit card, pay off the bill at the end of the month and don't use more than what you can pay for with cash. Some banks and credit unions may even extend you a credit card with a low credit limit, even with zero credit history.
- Take out a credit-builder loan: Consider applying for a credit-builder loan. As the name implies, this is a kind of loan specifically catered to help build your credit and is often offered by banks, credit unions, and specialized lenders. When you take out a credit-builder loan, your lender takes the funds you borrow and put it into an account, which you will make payments until the full amount is paid. Your payment history will be reported to the credit bureaus by your lender and help you build your credit history. You will receive your funds once you have paid off the loan. At this point, the credit bureaus will have enough information on you to generate a credit score. Another possible option is to take out a small loan or a secured loan with a bank or credit union. Like a secured credit card, you will use your funds as collateral by putting it into a secured account or a certificate of deposit and payments will be reported to the credit bureaus. Interest rates on these are usually higher than what you will be earning on the account.
- Find a cosigner: Consider asking a trusted family member or friend with good credit to cosign a loan or credit card. While this can help you qualify for better terms and lower interest rates, keep in mind that your credit and your cosigner's credit is on the line; if you fail to make payments or default, it can damage both parties' credit.
- Become an authorized user: If you have a trusted family member or friend with good credit, ask if you can become an authorized user on their credit card. While they will still be the primary cardholder and still be required to make payments on the card, your borrowing history can help you build your credit history -- just check with the card issuer to make sure that your activity is reported to the bureaus.
Once You Have Established Credit...
There are many different types of credit scores, but to have enough credit history to generate a FICO® score, you will need:
- At least one credit account that has been open for a minimum of six months
- At least one creditor who has reported a minimum of six months of your activity to the bureaus
The requirements to generate a VantageScore (FICO®'s biggest competitor and another commonly used credit score) is less rigorous.
Once you have established credit history, you can continue to build and maintain your credit score with the following methods:
- Make on-time payments: This is the most important factor that impacts your credit score. A single late payment can cause your credit rating to drop substantially, and multiple late payments can cause your credit accounts (and other accounts like utilities and gas) to wind up in collections.
- Keep low credit utilization: Your credit utilization is another huge factor in making up your credit score. Ideally, you want to use less than 30% of your available credit.
- Don't take out too many credit cards: While you can open a new credit card if needed, applying for credit cards frequently can cause inquiries that damage your credit slightly. If you do need a credit card, be sure to wait around six months before taking out a new credit card.
- Don't close old credit accounts: Let's say you've paid off a credit card that you have no intention of ever using again. Your first instinct is probably to close it, but it's a better idea to keep your old credit accounts open. After all, part of your credit score is made up by the length of your credit history and closing an old account increases your credit utilization.
- Monitor your credit: Use a credit monitoring service to keep track of any changes in your credit score and notify you if there is any misuse of your personal information. Many credit card issuers give you monthly updates on your credit score (online or through the mail). You can also check your credit report (or a detailed record of your credit history) for free once a year at AnnualCreditReport.com and double-check that the information listed is correct. Any incorrect information or discrepancies can be taken care of through credit repair, which you can either do on your own or by enlisting the help of a reputable credit repair company.
Ready to begin your credit journey? Look to our top-rated financial services here.
What does it mean to have insufficient credit references?
Being denied credit due to "insufficient number of credit references" means that you don't have enough accounts on your credit reports to meet your lender's requirement for extending credit.
How do I build credit when I have none?
There are several ways to go about this. First, practice good financial habits such as lowering your amount of debt and paying off past-due accounts. You can also take out a secured credit card, store card, secured loan, or credit-builder loan to begin establishing your credit history.
Can I get a personal loan with no credit?
Yes, but like bad credit loans, they will have high interest rates. You can find lenders and lending networks with reasonable terms here.
How do I get a credit card with insufficient credit?
There are several ways to get a credit card with no credit. You can take out a secured credit card, store card, student card, or turn to your bank or credit union for a low-limit credit card. Once you have established positive credit history, you can qualify for credit cards with better terms and lower interest rates.
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