Insufficient Credit? This Is How You Build It

If you have never taken out a loan, used your own credit card, paid a mortgage, or used any other form of credit, you might be "credit invisible" or "unscorable"—meaning you have no credit or limited credit history with the three major credit bureaus.

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 generated by different agencies, but the one most used is your FICO score

Your FICO score is a three-digit number that ranges from 300 to 850. Information provided to the three major credit bureaus—Experian, Equifax, and TransUnion

Your payment history, credit utilization, credit history length, new credit, and mix of credit determines your credit score. A good credit score can help you obtain loans and lines of credit with lower interest rates and higher borrowing limits.

According to the Consumer Finance Protection Bureau, around 20% of the U.S. adult population is credit invisible or unscorable.

There are a few situations that may result in a borrower being unscorable or credit invisible. Consumers who have no credit history, close their only credit account after paying it off, or don't have an active account in the previous six months won't generate a credit score. Credit invisibility may also result from individuals who have credit only with companies that don't report regularly to the major credit bureaus.

Why Is Having Credit History So Important?

Most individuals use credit in some capacity, such as shopping online or making store purchases with a credit card or taking out an auto loan or student loan.

Having established credit history is important for a number of reasons:

• Longer credit history with on-time payment contributes to 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).
• Lenders require individuals to demonstrate established credit histories to buy a home.

What Happens If I Don't Have An Established Credit History?

Even if you don't have any debts, lenders treat not having any discernible credit history 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 a positive, established credit history, most lenders consider you a high-risk borrower and you may end up facing some difficult consequences in the future:

• You may have difficulty qualifying for lower interest rates.
• You may not be able to qualify for an auto loan, mortgage, or credit card.
• You may not be able to get high amounts on loans and lines of credit.
• You may have to put down a security deposit for utility services, such as electricity and cable.

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 hard 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, such as using credit and making full payments on time, it can take around 3-6 months to start building up enough data to generate positive credit history.

The result? You will eventually be able to qualify for better loans and credit cards and bypass security deposits when turning on utilities.

So, how do you start building your credit? Below, we list some techniques and tips to begin your credit journey:

• 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 for any type of credit 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 inaccurate reporting to the credit bureaus.
• Ask your creditors to report your information. Not all creditors report your information to the three major credit bureaus, so if yours doesn't, 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 in the same manner 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 that may have lower interest, higher limits, and rewards. (Note: Be sure to apply for a secured card that reports to the credit bureaus.)
• Open a student card from a university or a store card from a retailer or gas station. These usually don'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.
• Take out a credit-builder loan: Consider applying for a credit-builder loan. As the name implies, this is a kind of loan to help build your credit. When you take out a credit-builder loan, your lender takes the funds you borrow and puts them into an account. You make payments until the account is paid in full. Your lender reports your payment history to the credit bureaus, which helps you build your credit history. You receive your funds once you have paid off the loan. At this point, the credit bureaus should have enough information on you to generate a credit score.
• Take out a secured loan with a bank or credit union. Like a secured credit card, you use your funds as collateral by putting them into a secured account or a certificate of deposit. The bank reports the payments to the credit bureaus. Interest rates on these are usually higher than what you can earn 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 and money are 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 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 count that's been reported to the credit bureaus within the six-month period

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 or accounts that have gone to collections can impact an individual's credit score.
• 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 often 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 one.
• 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. 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 with the help of a reputable credit repair company.

Ready to begin your credit journey? Look at 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 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?

You can take out a secured credit card, store card, secured loan, or credit-builder loan to begin establishing your credit history. You can also ask lenders, such as utility companies and landlords, to report your payment history to the credit bureaus.

Can I get a personal loan with no credit?

Yes, but like bad credit loans, they will likely 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 little to no credit. You can take out a secured credit card, store card, or student card or turn to your bank or credit union for a low-limit credit card. Once you have established positive credit history, you may qualify for credit cards with better terms and lower interest rates.

About The Author

Bryan Huynh

Product Tester & Writer

Bryan Huynh, a committed Product Tester and Writer, ensures that you are well-informed, guiding you in discovering and comparing top-rated financial services, including personal loans, business loans, credit repair, and tax relief.

Articles by Bryan Huynh

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