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One common misconception about credit is that having no credit history is equivalent to having a bad credit score. It sounds right at first, but that’s not the case. People without a credit history are in a completely separate category from those with poor credit.
Here’s what you should know about having no credit, including what your credit score really is before you get your first account and how to turn it into a good credit score.
If You Have No Credit, What is Your Score?
If you have no credit, you have no score. That doesn’t mean your credit score is zero or even that you have a bad credit score. Without any credit history, you don’t fall into any credit range. You’re credit invisible.
It wouldn’t be fair at all to lump people who have made no mistakes in with those who have a low credit score because they declared bankruptcy.
Besides, it’s impossible to have a credit score of zero, even if someone intentionally sabotages themselves or their credit. Most modern credit scoring methods bottom out at 350.
How Long FICO® and VantageScore® Take to Give You a Credit Score
FICO Scores and VantageScore are the two most popular credit scoring models. The former is older and better established, and the company claims that 90% of top lenders use at least one FICO credit score variant.
VantageScore is gaining ground, though. They claim that 9 of the 10 largest banks and 29 of the 100 largest credit unions use their credit scores in one or more lines of business.
If you’re currently trying to start building a credit score, you’ll probably be interested in generating both of them.
Fortunately, the VantageScore model will be able to calculate a score for you after one month of activity on a single credit account.
You won’t have a good credit score yet (or even necessarily an average credit score), but you won’t be credit invisible anymore either.
It’ll take you significantly longer to receive a FICO Score, though. The model requires six months of activity on at least one credit account to generate a score.
How Credit Scores and Credit Reports Work
You probably know there’s an intimate connection between credit scores and credit reports, but you may not understand how they work together. Roughly 40% of Americans feel some level of uncertainty about how their credit scores are calculated.
Here’s what you should know.
When you interact with a lender, they have the option (but not the responsibility) to report the details of your activities — including things like available balance, outstanding balance, payment behavior, and more — to the credit bureaus.
A credit bureau, also known as a credit reporting agency, compiles borrower activities into credit reports. There are three main consumer credit bureaus — Experian, TransUnion, and Equifax.
Once you develop a credit history, your credit reports will contain a compilation of your various accounts, payments, balances, and more. Both you and your future lenders (when you permit them as part of a credit application) can reference the information in the report.
Bureaus use that information to generate credit scores by inputting the details into a credit scoring model. There are many different variations of each, including FICO Scores and VantageScore.
Exactly which score is used to make a lending decision may be specific to the lender or the product they’re underwriting. For example, FICO Score 8 is the most popular overall, but a mortgage lender might use FICO Score 2 to help them decide whether they want to give you an FHA loan.
I Don’t Have a Credit Score, What Should I Do?
Approximately 26 million American adults (about one in ten) are credit invisible and have no score due to their lack of credit history. If you’re one of them, don’t worry. Everyone has no credit at some point, and you can get through it too.
The first step in building a credit score is to get a mix of credit accounts. Your options are limited when you don’t have any credit history, but plenty of credit lines are still available to you.
Ideally, your credit mix should include both major types of credit:
- Installment: Installment debt follows what you might think of as the ‘standard loan structure.’ The lender gives you a lump sum which you then pay back (plus interest) over a set period of months or years. This category includes your average personal loans, auto loans, and home loans.
- Revolving: Revolving debt refers to accounts that borrowers can draw on, at will, up to a credit limit. They can then pay off the balance in installments or all at once, with the option to repeat as necessary. A store credit card or a home equity line of credit are both good examples of revolving debt.
Not only is opening up credit accounts a prerequisite for demonstrating responsibility with credit but simply having a diverse credit mix will contribute to your credit score.
VantageScore considers credit mix and experience “highly influential” to their model, and FICO weights credit mix as 10% of its calculation.
Credit-Builder Loans
If you don’t have a credit score, a credit-builder loan is one of the best ways to access installment debt. They have a lot to offer, including:
- No Credit Check: Most credit-builder loans don’t require a credit check. Not only does that make them accessible to people with no score or poor credit, but it also saves them from having a new hard inquiry on their credit report (which can cost points in the new credit category).
- Build Credit and Savings: The structure of credit-builder loans is the opposite of a conventional loan. When the borrower is approved, their loan proceeds go into a locked savings account, which they can access after their last payment. That way, the lender is protected while the borrower builds their payment history and savings.
- Low Risk: Many credit builder loans allow you to cancel at any time, soem without penalty. The lender will then report the account as paid off. That savings reduces the potential of someone taking out a loan to build credit, missing a payment (or paying late), and doing more harm than good.
CreditStrong’s credit-builder loan offers all that and more. Choosing from one of their preconfigured plans means you can choose to structure your account to prioritize saving money quickly, maximizing your length of credit history, or keeping your monthly payment as low as possible.
What’s more, CreditStrong credit builder loans get results. You don’t have to take our word for it, either. We wanted to prove our effectiveness so you could feel as confident as we are.
To that end, we studied the results of a population of tens of thousands of CreditStrong credit-builder account holders.
We found that customers with no credit score when they opened their accounts earned an average score between 630 and 650 after 12 months of timely payments! That’s not a bad credit score for someone who’s just getting started.
CreditStrong accounts really work, and they can work for you too. If you have no credit and want to start building a score, give one a try today!
Check out CreditStrong credit builder account plans and pricing here.
Secured Credit Cards
If you’re looking for an introductory revolving debt account to diversify your credit mix, look no further than the secured credit card. They’re one of the most accessible accounts on the market for people with no credit history.
To get a secured card, borrowers must make a cash deposit with their lender (called a security deposit), which usually serves as the available credit limit for the account.
Because the borrower can’t spend more than the lender holds as collateral, the lender doesn’t have to be afraid of defaults.
You probably won’t find a secured credit card with much in the way of rewards or incentives, but that’s not why they exist. Most of them are explicitly for people with no credit history.
You should be able to find one that meets your needs with no annual fee, so there’s no need to pay any more than the deposit for the privilege of a secured credit card.
Those deposits are refundable if you pay off and close the card, but it might also be possible to roll the account into an unsecured line without closing it. Some lenders allow this after around a year of good behavior, so check with your card issuer.
What To Do After You Get a Credit Builder Loan or Card
Applying to accounts that build credit and diversifying your credit mix is a great first step toward building credit, but it’s still just the first one. There’s still a lot left to do if you want to receive a score, especially a good one.
Here’s what you should do once you’ve acquired your credit builder loan, secured credit card, or another starter account.
Make Payments On Time
If you internalize and apply just one lesson about building credit, let it be this: Make your monthly payments on time.
Staying on top of your debt payments is essential to building a good credit score. You can do everything else right, but if you miss your payments, you’re still going to lose points.
Payment history is worth 35% of your FICO Score, making it the most heavily weighted factor. It’s as important to your score as your credit mix, length of credit history, and new credit activity combined.
Most lenders will charge you a late fee soon after you miss a payment, but you’ll have at least 30 days before they report it to the credit bureaus.
Still, don’t make a habit of flirting with that threshold. If you mess up and pay late even once, it can have significant repercussions, especially with a thin credit file.
That said, don’t let the payment languish just because you missed the 30-day window. Letting it go longer will damage your credit further (i.e., 60 days late is worse than 30 days).
It’s a good idea to set up auto payments on your credit accounts so you won’t have to worry about forgetting one. Keeping even a small emergency fund in place should help you avoid any potential overdraft fees.
Make Complete Payments
Unfortunately, making timely payments is only effective if they’re also complete payments. For example, say you owe a minimum of $50 toward your installment loan on January 1st.
If you make your payment on the correct date, but you only ever pay $35, lenders will still report it as a late or missed payment.
It will lower your debt balance, but it won’t save you from the late fee or the eventual hit to your credit score.
Stay Under Your Credit Card Limit
There’s long been suspicion that using a credit card encourages overspending. Whether or not there’s direct causation there is up for debate, but there’s no denying that credit cards allow for overspending.
Be careful not to let the balance on your credit card or other revolving debt accounts get too high. Not only can that increase the likelihood of you missing a payment, but a balance too close to your credit limit will hurt your score.
Your outstanding credit balances account for 30% of your FICO score, and VantageScore also considers them “extremely influential.”
A common rule of thumb is to keep your credit utilization ratio (outstanding balance divided by total available balance) to 10% or less.
For example, if you owe $500 on a credit card from your local credit union with a limit of $1,000, you have a credit utilization ratio of 50%. That could look risky to lenders.
Keep it at or below 10%. Lower is always better, provided that you’re still using the credit card and reporting payments.
Don’t Apply for a Bunch of Credit At Once
Remember how one of the benefits of our credit builder loan is the absence of a credit check? That’s partially because credit checks trigger hard inquiries (when a lender pulls your credit report), too many of which can damage your credit.
If you’re shopping around for an account that requires you to make interest rate comparisons (such as a private student loan, personal loan, or auto loan), inquiries close together will usually count as one.
However, that’s not the case if you’re shopping for a credit card, so don’t apply wantonly to just any financial institution. These inquiries and new credit activities count for 10% of your FICO Score.
Note that these are in contrast to soft inquiries, which occur when a third party checks your credit for a reason other than lending you money (or you check it yourself). Soft inquiries do not show up on your credit report and will not hurt your score.
Monitor Your Credit
Finally, get into the habit of monitoring your credit regularly, especially now that there are so many free services that can help you these days.
Usually, you can get one free copy of all three of your credit reports (from Experian, Transunion, and Equifax) at AnnualCreditReport.com.
That’s just your credit report, though, so you’ll have to get your credit scores separately. Fortunately, dozens of providers offer free credit score services.
You can always start with your credit card company or financial institution first, but if they don’t offer free scores (or just not the one you want), you can use third-party services like Experian or Credit Karma.
Start Building Credit Today
If you haven’t started building credit yet, don’t put it off for long. Your length of credit history is worth another 10% of your FICO Score, so you benefit by starting immediately.
Every little bit helps, and the sooner you open your first credit account, the sooner you’ll have excellent credit. Find your first credit account today and start building that credit history!
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