Insufficient Credit History: A Complete Guide

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Finances stress people out, but they don’t have to. The more you understand about how your personal finances work, the more control you can take over them, and the more power you put in your hands. You can take control of your money. You can take control of building a positive credit history.

Your credit history comes up every time you apply to rent an apartment, get a loan, a credit card, or even a lot of jobs. With a little bit of time spent understanding how it works, you can build a credit history that will make you stand out as an attractive applicant and have companies feeling lucky to have you as an applicant. This will give you power for negotiating interest rates or shopping around for the best terms.

What An Insufficient Credit History Means

Insufficient credit history is something you might hear when you go to apply for a loan or a credit card. It means that you don’t have enough information in your credit history to give you a score. This is also often known as being credit invisible.

Your credit score is compiled based on information in your credit history. There are three major credit reporting agencies that keep a file on you, Equifax, Experian, and TransUnion. Each of these agencies takes those reports and create a credit score that companies can ask them for once you’ve given your permission.

Your credit history is made up of information like payments on credit cards with major companies that report your payments, payments on loans, and late or missed payments on those accounts or any account (even the library might report to a credit agency if you fail to pay your library fees). When calculating your score, your payment history is taken into consideration. So is the age of your credit history (how far back your payments go) and the amount of debt you have versus the amount of credit available to you.

If you don’t yet have any loans, credit cards, or other accounts that report to the major credit reporting agencies, then you haven’t yet built up a history of information for a credit report, and so they can’t calculate a credit score for you. This means you have an insufficient amount of credit history to create a score and some lenders will question your creditworthiness.

No Credit History vs Poor Credit History

Unfortunately, having no credit history can sometimes be worse than having bad credit. When you go to apply for things, the company doesn’t have a way to assess how likely you are to make your payments and so they have a hard time deciding whether to approve your application or what to charge you for an interest rate even if they did. If you had a poor history, they could offer you a higher interest rate or the option to pay a deposit, but still, accept you.

When you don’t have any history, you are often turned down for loans, credit cards, cell phone plans, and apartments. It’s difficult even finding companies to work with you, let alone finding a favorable deal.

How to Overcome An Insufficient Credit Profile

Remember that everyone starts their financial life without a credit history, so everyone has to overcome this problem at some point. There are many ways to work on overcoming this.

The first way to build some history is a secured credit card. They often offer these at banks. Confirm with the bank they report to the credit reporting agencies. When you apply for the account, you put down a deposit, usually a few hundred dollars, and that becomes your credit limit. Responsibly spend a little each month, preferably under thirty percent of the limit and an amount you know you can pay off at the end of the month, and then keep making your payments. Over time, you will build a history with this account.

You can also do something similar with a CD secured loan. You can purchase a CD, which is a low-risk investment account. You put your money into a CD for a set term, often one year. Then you take out a loan from the bank for the amount of the CD and pay it off over that year. This helps build history.

But what about the payments you’ve already been making?

You likely have utility accounts, like for your cell phone bill, gas, electricity, television, or internet. These companies will report you if you don’t make a payment on time, but rarely report your on-time payments. You can call each of them to see if any of them would report your payment history. Some will, and some won’t. It’s worth taking an hour to make these phone calls if you can get some positive payments on your credit history.

You can also discuss the same option with your landlord and see if they would work with you on this.

Do you have a close family member willing to you to their account as an authorized user? You need to be sure this person is responsible and making their monthly payments on time. If they are, you can be added to their account as an authorized user and start having this payment history build up on your report as well.

How Long It Takes To Overcome Insufficient Credit History

With three to six months of on-time payments on an account that reports to the major agencies, you can start to build up a credit history. Be aware, however, that many providers will still consider this timeframe to be too short and may still tell you that you have an insufficient credit history, even after six months of payments on your report.

You never want to take on more accounts than you can handle. So do not go out and take every loan or credit card you can get and start using them, hoping to speed up the process. Even one late payment will have a negative effect on your credit score, so you need to take things slow and make sure your finances can handle everything you take on. That being said, having more than one account can be helpful. If you can get some of your utilities that you’re already paying on to report, that would be the most helpful. If you also take on a secured credit card, then within a year, as long as you have been making your payments responsibly, you should have sufficient history.

Don’t be in a hurry, though. This takes time. Put in the effort and focus on building a positive history over everything else.

How to Get a Loan With Insufficient Credit History

If you are interested in getting a loan just to build up a credit history, you can get a CD secured loan as mentioned above.

If you need a loan for the money, then you have a few options. The first is to get a co-signer. If you can get someone else to sign on to the loan, then they would also be responsible if you fail to make your payments. This means that if you didn’t pay, and they couldn’t make the payment, then their credit history would be damaged. This is a big thing to ask of someone. But if you have a family member with a good credit history willing to take on the risk, then this is a way for you to get a loan and build some history.

If you have a car or a home, you can use these items as collateral for a secured loan. In this instance, if you failed to make your payment, the lender could take your home or vehicle and sell it to help them recover the money they lost. If you are not a hundred percent sure that you will make your payments, this is a serious risk, so it’s something you should consider carefully.

Getting a Credit Card With No Credit History

As mentioned above, an easy option when you don’t have a history is to apply for a secured credit card, where you deposit some money into an account and the bank or other financial institution uses that money as your credit limit and as a way to secure that you will make your payments. If you were to fail to make your payments, the company would take the money you deposited to recover their losses (and report that you didn’t pay to the credit reporting agencies, which would be bad for your credit score).

Regular credit cards are unsecured, meaning the company is betting on your positive credit history that you will make your payments. It’s difficult to get an unsecured card when you don’t have a history. The easiest way to do this would be to become an authorized user on the account of a family member or friend or to have them sign on to join an account with you. Again, you would need to be sure that you can make these payments on time, and that the person you signed on with had a good credit history and was comfortable doing this with you. If either of you didn’t make the payment on time, both of your credit scores would suffer.

Once you have built up a good credit history, you will be able to get an unsecured credit card on your own and be offered a low-interest rate. Until that time, it will be difficult for you to get approval on your own, and when you do, you will be offered very high-interest rates.

Moving Forward

As you move forward, remember that you are in control. You can make your credit history anything you want it to be as long as you put in the time, effort, and make your payments on time. Making smart and responsible financial decisions will lead to an easier time getting approval and low-interest rates that will save you money.

Steven Millstein

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