Having no credit is different from having a damaged credit history, but both can complicate your financial life. If you have one or the other, it can make it difficult to qualify for loans and apply for credit cards.
It can be more challenging to overcome having a bad credit score than having unestablished credit. However, you can create a positive credit score regardless of your credit history.
When you have no credit, it means you’ve never taken out a loan or credit card before. You don’t have a consumer credit report as you have zero credit history.
The first time you borrow money from a financial company/institution (e.g. a bank), your credit history will begin.
That information will then be passed on to one of the three major credit reporting agencies – Experian, Equifax and TransUnion – who will then create a credit report in your name.
The information that appears on your credit report depends on the type of credit you have. For instance, loans will show the amount you borrowed, but credit card accounts will show the available limit and balance.
You’ll also be able to see the date you applied for the loan/credit, the date it was granted and your monthly payment plan.
Next, the credit scoring company will take the data from your credit report, and put it into a system that will predict credit risk. This is then transformed into a numerical score, which typically lies somewhere between 300 to 850.
If you don’t have credit history or a credit score, lenders have no way of knowing what kind of credit risk you may present. You may not have demonstrated that you are irresponsible, however, you also haven’t proved that you are responsible.
Having a bad credit score means that you’ve made credit management mistakes in the past. It could be something as simple as paying your bills late or something as serious as filing for bankruptcy.
Any negative information on your credit report will be calculated into your credit score, which will most likely cause it to drop.
These are based on two of the biggest credit scoring companies.
– Fair: 580-669
– Very Poor: 300-579
A FICO score which exceeds 670 is best when you apply for financing.
– Fair: 601-660
– Poor: 500-600
– Very Poor: 300-579
A lot of people struggle with bad credit, as around 33% of consumers have FICO scores below 670. Similarly, around 40% of consumers have a Vantage Score credit score of 660 or lower.
Even though both bad credit and no credit can complicate finance applications, having a bad credit score is typically worse in the eyes of a lender.
The primary reason is that lenders are more willing to deal with a person with no credit, than someone who has a damaged credit history as the consequences of having bad credit can be more severe.
For instance, lenders may be willing to offer you a mortgage with no credit, but finding a home loan with a low credit score is virtually impossible.
It isn’t always easy to find someone to take a chance on you as a credit newbie. Thankfully, some credit card issuers offer products to people who have no established credit.
If you’re building your credit from scratch, take a look at the following options to get an idea on how to start.
Secured Credit Cards
A secured credit card is a special type of account in which the issuing bank will ask you for a deposit when you open it.
Usually, the deposit you put down is equal to the credit card limit the card issuer will assign to you. If you are unable to pay your balance, the issuer can claim the funds held in your deposit.
You need to make sure you manage the card well. This includes using it often and paying the balance in full by the due date every month. Paying in full avoids high credit utilization and interest fees.
Before applying for a secured credit card, check that the card issuer reports to all three major credit bureaus. This is one of the quickest and simplest ways to build a positive credit score just as long as you keep on top with the payments.
Unsecured Credit Cards
If you don’t want to put a deposit down, consider getting an unsecured credit card instead. These can be pretty hard to qualify for if you don’t have an established credit history.
However, some lenders do offer beginner credit cards (especially to students) to those looking to build credit for the first time. Bear in mind interest rates will be higher.
If you have a friend or relative with a good credit score, you can piggyback off of their credit card by being added as an authorized user.
The account will show up on your credit report, and as long as the primary account holder keeps the balance low and pays on time it should have a positive effect on your score.
You shouldn’t take on student debt for the sole purpose of building credit. However, if you already plan to borrow money to finance your college education, your student loans can also help you establish credit.
Like all loans, you must make every payment on time. If your loan is deferred or in a forbearance period, paused payments won’t damage your credit score.
If you regularly pay any kind of phone, utility or streaming service bill, you might be able to benefit from Experian’s Credit Boost.
This is a free service which gathers data from your bank account to help establish a credit history with Experian. This won’t, however, help with the lack of credit data issues with Equifax and TransUnion.
In order to improve your credit score, you need to know what you need to fix. Get a copy of your credit report and look for areas of concern.
Here are a few quick tips on ways to turn your credit around:
– Pay all bills on time: The more on-time payments on your credit report, the better, as payment history is the most important factor in credit score calculation.
– Keep balances low: Keep credit card debt below 30% of your credit limit.
– Pay off any unsettled collection accounts: You might not be able to hide that a debt went into collections from your credit report, but you can pay it off. A settled debt looks better than outstanding fees.