It’s hard to imagine any consumer being invisible in the digital world of the 21st century, but there are 26 million “credit invisibles” in America, according to the Consumer Financial Protection Bureau (CFPB).
Consumers with no credit history – never used a credit card, haven’t had a car loan, never paid a mortgage – are tagged as “credit invisible” by the three major reporting bureaus, Experian, Equifax and TransUnion.
If you have occasionally used some form of credit – probably a credit card, but possibly paid off a loan of some sort years ago – you are considered “credit unscorable” because there is not enough information to generate a credit score. The CFPB says 19 million consumers are in the “unscorable” category.
You don’t want to be in either of those brackets, but to escape, you’re going to need a credit history. The credit bureaus want to see how you use credit and whether you pay it back if you use a credit card or take out a loan.
What Is a Good Credit Score?
The standard for creditworthiness is a FICO score, a three-digit number, ranging from 300 to 850 that lets lenders know what sort of risk you pose as a borrower. Building a good credit score – anything over 700 – will help you borrow money at lower interest rates and receive credit cards that offer better rates, larger borrowing limits and more perks.
To get a FICO score, you must have a credit history, which means you need to get out of the “invisible” and “unscorable” categories. The first step in that direction usually is opening a credit card and making on-time payments over an extended period.
What Credit Score Do You Start With?
If you’re just starting to use credit, you’ll likely come in with a score in the 600 range and it will continue to improve, as long as you make on-time payments. The longer your credit history, the more accurate your score will be.
Why Do You Need Good Credit?
When you start using credit responsibly, your credit score improves and you will gain enormous advantages from both a convenience and financial perspective.
Credit cards are accepted at nearly every retail store, restaurant, gas station and mall in America. If you want to shop online, credit cards are an absolute necessity. Not having one makes the process cumbersome, if not impossible. Even public transit systems now use automated machines that accept credit cards and distribute tickets.
And when was the last time you saw someone pay for a restaurant meal with a check?
Having a credit history is crucial for bigger purchases, too. If you want to buy a car and need a loan, the dealership will run a credit check and look at your credit score.
If you’re planning to rent an apartment, expect a credit check as part of the vetting process. Cable companies and utilities check your credit and, if you don’t have a solid credit history, will require a security deposit.
Sometimes, prospective employers will access your credit rating when they are deciding whether to offer you a job.
So, having a credit history, and the credit report and credit score that go with it, is vital to your financial future. Here are some ways to get out of the “credit invisible” or “unscorable” categories.
12 Ways to Establish Credit
Fortunately, establishing credit isn’t hard, but you need to learn some tricks that will improve your borrowing profile. Consider these techniques:
- Get a store card – Many retailers and gas stations will give you a branded credit card, even if you have no credit history. Use it, but don’t buy more than you would buy with cash. Pay off the entire bill at the end of the month. Ask that the department store report your credit history to credit bureaus.
- Apply for a secured-credit card at a bank – With a small deposit, say $500, you can obtain what’s known as a “secured” credit card, one that allows your bank to tap your account if you fail to pay a bill. Your credit limit will be the amount you deposited. Though the card isn’t useful for making big purchases – most secured credit cards have a limit under $500 – if you pay your bills on time and leave your security money untouched, you will begin proving your creditworthiness. That will enhance your credit score. Once you have a strong credit score, you can close the secured card account and apply for an unsecured credit card.
- Apply for a credit-builder loan – This is a loan used specifically to build a credit score. The lender will put the money you borrow into an account, and you’ll make payments on the money until the full amount is paid. The lender will notify the credit-rating bureaus as you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning your credit score. Credit unions and community banks are often the best places to check for this sort of loan.
- Find a co-signer – If you have someone with a good credit score who is willing to co-sign a loan, and you repay the borrowed money, that will build your credit score. Not everyone will be willing to co-sign with you, since the other party is personally liable if you fail to repay the loan. If they can’t make the payments after you default, it will damage both of your credit ratings.
- Become an authorized user on another person’s credit card – If you know someone – often a parent or close relative – with a good credit history who is willing to make you an authorized user on their card, your borrowing can help establish your credit credentials even though the primary cardholder is obligated to make the payments. If establishing a credit history is the goal, check with the card issuer to make sure that your activity on the card is reported to a credit bureau.
- Report rent and utilities payments to credit bureaus – Rent reporting services like Credit Karma will add rental payment in your credit history. If you pay on time, it can help build you credit score. On-time payment of utility bills is a score builder. You should ask your phone, water, electric, gas or cable company if they report your payments to credit bureaus.
- Consider a student credit card – If you spend conscientiously, student credit cards designed for young borrowers can be a way of building a credit history. These introductory cards have disadvantages, including low borrowing limits and higher interest rates. You shouldn’t apply for one of these cards unless you are confident you have the money to meet the monthly bills.
- Make on-time payments every month – The golden rule for anyone building a credit history and credit score is: PAY ON TIME! That is, by far, the most important component in calculating your credit score. If you’re 90-180 days late making payments, you’re account could be turned over to a collection agency and that could be very damaging to your credit score. Paying on time is just a good personal and financial habit to form.
- Don’t use too much credit – The second biggest component of your credit score is how much of your available credit you use. The goal should be to use less than 30%. That means if you have a $1,000 card, don’t have more than $300 worth of charges on it.
- Go easy on the number of cards – It’s obviously smart to start with just one credit card and add another later, at least six months later, if you need it. If you apply for two or three cards at the same time, it sends a signal that you might be getting desperate.
- Be aware of identity theft – Look at your monthly bills to verify that you are the one who made all the charges on it and not someone who has stolen your identity. You also can receive a free credit report from each of the major credit bureaus every year to make sure all the activity on it belongs to you.
- Credit history matters – If possible, keep accounts open once you have them. If your card doesn’t have an annual fee and you don’t need it, put it in a safe place rather than closing the account. This can help your credit utilization rate, since it is computed using the combined borrowing limits on all your cards.
How to Build Credit Responsibly
One of the best ways to demonstrate responsible use of credit – whether we’re talking credit cards, auto loans or home mortgages – is to check your credit report and credit score at least once a year.
You can receive a free credit report from each of the three major credit bureaus by going to AnnualCreditReport.com and requesting it. You can get one at a time every fourth months or get them at the same time. Either way, compare the information from one against the other two to be sure there are no mistakes.
Also, checking your credit score has become increasingly easy … and free! Many of the card companies supply free credit scores on their monthly statement or by going online to their website and requesting it. There also are personal finance websites that offer free scores.
- Brevoort, K., Grimm, P., Kambara, M. (2015, May) Data Point: Credit Invisibles. Retrieved from https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf
- N.A. (2015, May 5) CFPB Report Finds 26 Million Consumers are Credit Invisible. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/cfpb-report-finds-26-million-consumers-are-credit-invisible/
- El Issa, E. and O’Shea, B. (2017, September 26) How to Build Credit. Retrieved from: https://www.nerdwallet.com/blog/finance/how-to-build-credit/
- Devaney, T. (2017, October 12) How to Build Credit from Scratch. Retrieved from: https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch/