Six Ways to Deal With Limited or No Credit
Limited or no credit? You're in good company.
One in four adults has either no credit history or not enough active credit to generate a FICO score, according to 2004 estimates from FICO, the company that pioneered credit scoring.
Many times, consumers with no credit history are new to the world of credit. They can find themselves in a Catch-22 scenario, says Jennifer Tescher, president and CEO of the Center for Financial Services Innovation.
"You need to have a credit history to get credit," she says. "And you need to have credit to build (a) credit history."
A "thin file" means you don't have much of a track record with credit. Either you have only a few accounts, or your credit is relatively new, or both, says Maxine Sweet, vice president of public education for credit bureau Experian.
While "thin file" consumers have passed the initial hurdle, they could still "have a much harder time" qualifying for certain credit products, such as credit cards or "instant" in-store accounts, as opposed to mortgages or community bank loans, says Tescher.
If you fall into either category, here are six strategies you can try to establish, re-establish or beef up your credit file.
Don't go Crazy With the Credit Applications
Some of the groups at risk for no credit or a thin file include young adults, the elderly (if they haven't used credit in awhile), new immigrants and people who avoid credit.
Working to establish credit? Go slow, be very selective in your applications and nurture existing accounts. Never pay late, and -- with credit cards -- keep balances reasonable.
With a thin file, even small mistakes can make a big difference in your score, says Ethan Dornhelm, principal scientist with FICO, which developed the FICO score.
Particularly dangerous: multiple applications, he says.
Someone who is "exploding onto the credit scene" -- going from no credit to multiple applications in a short period -- is "someone who could be getting in over their head," he says.
The Old Secured Credit Card
With a "thin file," you have credit -- just not much of it.
"You're in there and you have some data," says Tescher. "But you don't have enough trade lines to be automatically scored. And it usually means less than three trade lines (or accounts)."
One solution to build credit: a secured credit card.
Beware of "fee-harvester cards," says Linda Sherry, director of national priorities for Consumer Action. These cards charge fees for everything, and those fees are high, she says.
One good source for a secured card is your bank or credit union. "Many banks don't necessarily advertise these products, but they have them," says Tescher.
Make sure you opt for a credit card that reports your on-time payments to the three major credit bureaus -- Equifax, Experian and TransUnion. Some cards don't report or only report if the account goes into collections.
If you're looking to build good credit, you need a credit card that will tell the bureaus all about your good habits.
Buy Something Small
While most negative information comes off your credit report after seven years, even the good accounts can disappear after 10 years if they've been closed and/or inactive. In addition, some scoring formulas can't generate a credit score if it's been awhile since any of your creditors reported to the bureaus.
That means some people who had robust credit files at one time could potentially find themselves with a thin file or no credit score if they close accounts and/or stop using credit.
If you have a history of credit but no longer have a score, make a small purchase on one of your existing accounts, and pay it off right away, says Barry Paperno, consumer affairs manager with myFICO.com.
That will give you the recent activity the scoring formula needs to assign you a score, he says.
If you're new to the credit game, it could take awhile to get a credit score, depending on the scoring model used to compute it. For a FICO score, your oldest account needs to be at least six months old. Using the VantageScore model, a consumer's credit report could be scored after the first month of paying on a credit account.
Become an Authorized User
This strategy can be chancy for the authorized user and the primary cardholder.
In the perfect scenario, the authorized user gets charging privileges on another person's credit card, stays within whatever limits the cardholder sets and the cardholder's good payment history for that account appears on the authorized user's credit record.
The gamble if you're the authorized user: If the account holder misses payments, goes into collections or declares bankruptcy, that bad behavior can also land on your credit report.
Before you attempt this arrangement, find out from the issuer if you have the power to remove yourself from the account. Also, ask the issuer what would happen to account information -- good or bad -- that's already on your report if you're no longer an authorized user.
If you become an authorized user, monitor your credit report regularly to ensure the account is reporting and paid on time.
The gamble if you're the primary account holder: The authorized user could max out the card and leave you with the bill.
One possible solution: If you want to add an authorized user, don't give that person a card, says Sherry.
A 'Credit Builder' Loan
This product is very similar to a secured card, except that it's in the form of a loan.
One example: Your bank makes you a small loan, which you use to purchase a CD, says Tescher. The bank holds the CD, and you make monthly payments. At the end of your loan, you own the CD. Your gain: a small nest egg, plus a record of good credit, she says.
The price: any fees and interest you pay on the loan.
For a long time these and similar loans were a staple, particularly at small or community banks, she says. Now institutions "are taking them off the shelf and dusting them off because they are becoming increasingly relevant," she says.
Paying for money you don't need can be counterproductive -- the point of good credit is to save money -- so reserve this step as a last resort. If you use it, look for low rates, minimal fees and a lender that reports good behavior.
Ask Questions Before You Apply
With little or no credit, consider talking to lenders before you apply.
Some lenders have access to services that pull data from other sources for people in just your situation, says Tescher.
These services help lenders identify potential customers by analyzing data from nontraditional sources -- such as rental or utility records -- when potential customers don't make the cut based on traditional data, she says.
While seeking lenders who consider this information won't change your "classic" FICO score, it could help you get credit.
FICO offers lenders its own solution to scoring consumers with thin files. Called a "FICO Expansion Score," it includes alternative data, such as checking accounts, installment purchase plans and phone payments, to rate creditworthiness.
With the regular VantageScore, another credit-scoring model, nontraditional accounts (such as rent and utilities) will be factored into your score if they're on your credit report, says Jeff Richardson, spokesman for VantageScore Solutions.
The company also offers two thin-file scoring formulas: one for high-risk consumers and one for those with low risk, says Richardson.
Ask before you apply: If your conventional credit score or application doesn't make the grade, does the lender have a way of considering any additional data to underwrite you for credit?