Roughly 45 million Americans have no credit scores. They may be effectively locked out of many financial services. They may not be able to buy a home or rent an apartment. They may pay extremely high interest rates for loans.
If you’re in this position it’s important to understand your situation and know what you can do about it.
What Does it Mean to Have Insufficient Credit History?
Your credit score is based on credit files maintained by three major credit bureaus: Experian, Equifax and TransUnion. Credit scoring companies like FICO and VantageScore feed this information into algorithms that determine your credit score.
These algorithms require a minimum amount of information to generate a score. If you don’t have enough information in your credit file or if the records in your file are very recent, they will not produce a score. In this case, you won’t have a starting credit score and are said to have “insufficient credit history.”
The Consumer Financial Protection Bureau (CFPB) says 8% of adults have credit records that are “unscorable” by major credit rating systems. Another 9.9 million have insufficient credit history and 9.6 million lack recent credit history.
What Does it Mean to be Credit Invisible?
About 26 million Americans do not have any credit file at all: 11% of the U.S. adult population. They have never used a loan or a credit card or any other financial service that reports to the credit bureaus.
Individuals with no credit record are said to be “credit invisible.”About 26 million Americans — 11% of the adult population — are credit invisible.
How Does Credit History Affect Your Credit Score
Your credit history is reported to the credit bureaus by your creditors. Every time you borrow money or open a credit card the lender or card issuer opens a tradeline with the credit bureaus. They report your payment record on a regular basis.
This information becomes your credit file. Lenders use the information to decide how likely you are to default.
Your credit history does not include your race, age, gender, sexual preference, religion or income. It is a record of what you owe and how you pay it back.
If you have not used credit you will have no credit history. Even if you are financially secure and you manage your money well it will be difficult for you to borrow or to get a credit card.
How is a Credit Score Calculated?
The actual algorithms that generate your credit score are closely guarded secrets. Credit scoring companies like FICO, which provides the scores used by most lenders, have given us a general idea of what factors influence your credit score.
- Payment history makes up 35% of your FICO score. On-time monthly payments build good credit. Late payments or default will harm your credit score.
- Amounts owed account for 30% of your FICO score. This inludes your credit utilization ratio: the percentage of the credit limit on your credit cards that you actually use. Try to use less than 30% of your credit limit. Lower is better!
- Length of your credit history is 15% of your FICO score. Maintain your credit history by keeping old credit card accounts open. If you don’t want to pay an annual fee, contact your issuer and ask to switch to a free credit card account.
- Credit mix makes up 10% of your score. Creditors like to see a balance of revolving credit accounts, like credit cards, and installment loans, like a car loan or student loan. Try to have at least one account of each type.
- New credit makes up 10% of your FICO score. Applying for too many new credit accounts in too little time can make you look desperate for credit. That’s bad for your score.
All of these factors are analyzed to determine the probability that you will default. Different credit scoring models or companies may weigh these factors differently, but they use very similar criteria.
What Do You Need to Generate a Credit Score?
Different scoring models may require different amounts of information to generate a credit score.
FICO produces many different credit scores for different types of lenders. In general, to have a FICO score your credit history must meet these criteria:
- Your credit report must have at least one account that’s at least six months old.
- You must have one account that’s been reported to the credit bureaus in the past six months.
So if you’ve had a credit card for three years but you pay it off and stop using it, in six months you will have no credit score, because there’s no new data being reported.
VantageScore has more liberal requirements: you only need to have one account, and there is no minimum age. The Company prioritizes financial inclusion and claims that it is capable of scoring 96% of the adult population of the US. This may not help many borrowers, because a large majority of lenders and credit card issuers use FICO scores.
Most free credit score providers use VantageScore. If you are seeing a score from a free provider but you can’t get approved for credit, you may have a VantageScore but not a FICO score.
What Credit Score Do You Need?
Getting a score is just the beginning. You will need to have a credit score that convinces creditors that you are not an excessively risky borrower.
FICO Credit Score Ranges
FICO scores range from 300 to 850. FICO divides credit scores into these ranges.
- Bad credit: 300-579
- Fair credit: 580-669
- Good credit: 670-739
- Very good credit: 740-799
- Exceptional credit: 800-850
Some lenders and card issuers may use different credit score ranges.
VantageScore Credit Score Ranges
VantageScore breaks their scores into slightly different ranges.
- Very poor credit: 300-499
- Poor credit: 500-600
- Fair credit: 601-660
- Good credit: 661-780
- Excellent credit: 781-850
Remember that FICO and VantageScore use different algorithms to compute your credit score. You could be in one range with VantageScore and another for FICO.
To make matters even more complicated, your credit records with the different credit bureaus can be different: not all creditors report to all three bureaus. Your Experian FICO score could be different from your TransUnion credit score!
Where to Get Free Credit Scores
Free credit score providers like Credit Karma and Credit Sesame will provide you with a free VantageScore.
A free FICO score is somewhat harder to get, but it is possible. Here are some options.
- Your credit card issuer. Many credit card issuers, including American Express, Bank of America, Citi, Discover, and Wells Fargo, will provide free FICO scores to clients.
- Experian Boost. Experian Boost is a free service that lets you report phone and utility payments to the credit bureaus. They also give you free access to your Experian FICO score.
- Your bank or credit union. Many banks and credit unions will provide FICO scores for their customers.
- Credit-building products. Many providers of credit-builder loans, rent reporting services, credit-building debit cards, and other credit-building products provide free FICO score access. Check the product you’re considering.
- Discover provides free FICO score access through Discover Credit Scorecard. You don’t need to have a Discover card.
Your FICO score may vary depending on what credit bureau provides it but the difference will usually be small.
Why Does a Credit Score Matter?
Your credit score is a financial report card. It’s Monthly payment history makes up 35% of your FICO score. On-time payments build good credit. Late payments or defaults will harm your credit score.
- If you don’t have a credit score or your credit score is low you may not be approved for many forms of credit. It will be difficult to get a mortgage, an auto loan, a cell phone or an unsecured credit card.
- If you are approved for credit you are likely to pay extremely high interest rates. That can cost you a lot of money.
- Many people with no or low credit scores are forced to rely on predatory payday lenders, which can trap them in a cycle of high-interest debt.
- Credit scores aren’t just used by lenders and credit card issuers. Landlords, employers, car rental companies, utility providers, and other businesses use your credit record to decide whether they want to do business with you.
Improving your credit can open many financial options that you will not have with a low credit score or no credit score.
Which is Worse: Bad Credit, Insufficient Credit History or No Credit History?
Having no credit history or insufficient credit history is very different from having bad credit, and lenders are increasingly recognizing that difference.
No credit history or insufficient credit history does not mean that you are financially irresponsible. These simply mean that you have no used financial services that report to the credit bureaus. You can have an adequate income, pay all your bills on time and stick to your budget, but if you don’t use loans or credit cards you could still have no credit score.
Bad credit means that you have used credit and you haven’t handled it well. You may have made late payments, or seen accounts charged off or sent to collections. Those are huge red flags for anyone considering doing business with you.
Many businesses are willing to work with people who have no credit score. Many lenders are now willing to make decisions based on “alternative data,” like your banking history, employment history, income, even education. These lenders may not be willing to work with borrowers who have earned a bad credit score.
Challenges of Having Insufficient Credit
While there is a move away from treating credit scores as the sole indicator of financial responsibility, having no credit score can still be a serious problem. You will have to work to find lenders willing to extend credit to you, and you may pay above-average interest rates.
You may not feel that you need credit, and you may be unwilling to take on debt to build a credit history. That’s a legitimate perspective, but it can cause you problems. For example:
- You may need to buy a car for access to work, school, or essential services. It’s hard to buy a car without financing and hard to get financing without a credit score.
- You may need to borrow money to start a business.
- You may wish to rent an apartment from a landlord that checks credit.
- Without a credit score you may have to pay deposits for utilities, phones, and other necessary services.
Without a credit score access to credit and other services can be more difficult and more expensive. You may not need those services today, but tomorrow may be different. It’s best to try to establish at least a minimal credit history to prepare for major life events.
How to Fix an Insufficient Credit History
You can build a credit history without incurring excessive costs or spending large amounts of money. Here are some ways to do it.
Get a Secured Credit Card
A secured credit card works like a regular credit card, but you put down a deposit to secure your account. The deposit becomes your credit limit. The deposit reduces the issuer’s risk, so they are willing to issue these cards to people with no credit scores. Many secured cards have no annual fees, and if you pay your bill in full and on time you won’t pay any interest.
Many secured cards allow you to upgrade to an unsecured card once you establish a reliable payment history. Your deposit can be refunded or used to pay off your card balance.
One of the best ways to build a credit history is to get a secured credit card, use it to pay a small recurring expense that you’re paying already (like a Netflix subscription or your internet bill), and set up an automatic payment from your bank account to cover the bill. Then you can put the card away. The account will be active, your credit utilization will be low, and the bills will be paid on time!
Best Secured Credit Cards to Build Credit
Here are some proven secured cards that make great credit-building options.
Any of these cards will get you started on your credit-building journey.
Consider a Credit Builder Loan
A credit-builder loan is an installment loan designed to help you build a credit history. The money you borrow is placed in a locked account. When you finish making the payments, the full sum is released to you. That limits the lender’s risk and lets them make these loans to borrowers with no credit scores.
Because a credit-builder loan is an installment loan, it makes an ideal partner to a secured credit card: having one revolving account and one installment loan will build your credit mix. The lump-sum you get at the end of the process is an added benefit!
Online credit-builder loan services like Self offer flexible loan amounts and payment plans, and are inexpensive and effective ways to establish your credit history.
Become an Authorized User
Authorized user status is one of the easiest ways to start your credit history. If a family member or friend with good credit and good money management habits adds you as an authorized user on their card the record on that card will go on your credit history. You don’t need to use the card.
Not all card issuers report authorized users to the credit bureaus. Check first!
Use a Payday Alternative Loan
Many credit unions offer small loans designed to help their depositors avoid the payday loan trap. Your payments on these loans will be reported to the credit bureaus and can help you build your credit history. Enquire with your bank or credit union.
You will pay interest, so it’s best to use these loans when you really need the money.
Take Out a Personal Loan With a Co-signer
Getting a co-signer with better credit can get you approved for a personal loan. Your payments will help build your credit history. Again, only do this if you are using the money for something you need. It’s usually not a good idea to borrow just to build credit history!
Be sure that both you and your co-signer fully understand the responsibilities and risks of co-signing a loan.
Use a Rent Reporting Service
Rent reporting services like Boom and Esusu Rent can place up to two years of rent payment history on your credit report and continue reporting your ongoing payments. If you’ve been paying rent on time for years this is an effective way to build credit history.
You will pay for the service, so you’ll have to decide whether the cost is worth it to you.
Do you need to build credit? Check this out to learn more:
Other Ways to Boost Your Credit Score
The methods above will help you get started. To make the most of your new credit history, try these options.
Develop Good Credit Habits
Understanding credit scores and building good credit habits is the most effective way to build good credit. Here’s where to start.
- Make every payment on time.
- Know the credit limits on your cards and keep your balance below 30% of the limit. Lower is better!
- Use different types of credit. A balance between credit cards and loans is best.
- Don’t close old accounts. You’ll shorten your credit history and hurt your credit.
Understanding credit and managing your finances well will help you build a solid credit score.
Sign Up for Experian Boost
Experian Boost is a service that places your phone and utility payments on your Experian credit report. Your credit reports with Equifax and TransUnion won’t be affected, so the impact will be limited. There’s no cost and late payments aren’t reported, so there’s still nothing to lose. You even get free FICO scores!
Identify Problems and Fix Them
Every year, you are entitled to a free credit report from each of the three major credit bureaus: Experian, Equifax and TransUnion. You can get these free credit reports at annualcreditreport.com.
Review these reports regularly and check for errors or any entries you don’t recognize. Up to 25% of credit records have errors, and many of these errors can reduce your score. They could even be signs of identity theft.
You can remove errors from your credit reports using the credit dispute process.
Hire a Credit Repair Company
If your credit is bad and you have a large number of negative entries on your credit report, you may not be able to dispute all of the records yourself. A legitimate credit repair company can help.
The credit repair industry has earned a bad reputation. Many companies have questionable reputations and some are outright scams. There are still some that will work to help you improve your credit history. Do your research before you choose a credit repair company!
You will pay for credit repair services, so be sure that you cannot handle the disputes yourself stand that the cost is worth it for you.
The Bottom Line
Having an insufficient credit history means that you have no credit score. That’s a problem, but it’s also an opportunity. With little or no information in your credit file, you can take conscious action to assure that the information that goes into your credit file is positive.
It will take some time to build the credit score that you want, but if you start with a good base of knowledge and you manage your credit carefully, you won’t have to contend with negative reports dragging your credit down. You can have a credit score within six months and you’ll have a very good chance of building a very good or excellent credit history.
A good credit score is a doorway to better and cheaper financial services, and you can get one without going into debt or spending a fortune!
If you get a new Social Security Number the Social Security Administration will link your old number to the new one. There will be no impact on your credit and your credit record will still be with you.
Banks do not report savings account activity to the credit bureaus. A well-managed savings account may help you get credit from a creditor that uses alternative data but it will not help you get a credit score or build a better credit score.
Banks do not report deposits and withdrawals to the credit bureaus, so cash deposits will not affect your credit score in any way.