Insufficient credit history means you have no proven track record with creditors that lend money or other assets.
Whether you’re applying for rental property, a personal loan, a student loan, a line of credit or something similar, there’s another party that will depend on you to fulfill your promise to pay. Some of the parties that can access your credit report include:
- Insurance companies
- Banks and financial institutions
- Landlords and employers
- Mortgage lenders, auto loan lenders and other lenders
The credit score was created in 1956 by the cofounders of the company that is known today as FICO®. Lenders now rely on this score, or some variation of it, to evaluate the creditworthiness of recipients to calculate interest rates.
Before you’ve established creditworthiness, you may be wondering whether no credit means bad credit. Thankfully, having no credit history doesn’t necessarily mean you have bad credit. It simply means you haven’t proven whether you can be trusted to pay back your debts. Unfortunately, most lenders want proof of credit history before they’ll approve a loan, which means you need credit history in order to build credit history—a classic chicken-or-the-egg problem.
If you have an insufficient credit history, you are far from alone. The Consumer Financial Protection Bureau (CFPB) reports that eight percent of adults had credit records that were “unscorable” by major credit rating systems. Almost half of these “unscorable” records were for insufficient credit history, and the other half were for a lack of recent credit history.
How Credit History Contributes to Credit Scores
Although nearly 90 percent of consumers begin to accumulate credit history in their mid-to-late twenties, the CFPB reports that more than 11 percent of adults in 2010 were “credit invisible,” which means they don’t just have an insufficient credit history—they have zero credit history.
The three major credit bureaus—TransUnion, Experian and Equifax—are tasked with collecting and maintaining the creditworthiness of the general population. Lenders and other parties interested in someone’s creditworthiness can make an inquiry into the borrower’s credit score. These scores can range from 300, which is extremely poor credit, to 850, which is exceptionally good credit.
According to FICO, the algorithm for calculating a credit score contains five components that are assigned the following weights:
- 35 percent | Payment history
- 30 percent | Amounts owed
- 15 percent | Length of credit history
- 10 percent | Credit mix
- 10 percent | New credit
Looking at this breakdown, it’s clear that the most important aspect of your credit score is making regular, on-time payments for amounts greater than or equal to the minimum amount due. It’s also important to maintain a low debt-to-income ratio, which means the amount of debt you owe should be relatively low compared to your income.
The various credit reporting bureaus have slightly different methods of calculating your credit score. TransUnion, for example, reports that payment history accounts for 40 percent of the score and the length of credit history accounts for 21 percent.
Is One Year of Credit History Enough?
Typically, you need six months of credit history in order for a credit score to be calculated and reported by the major credit bureaus. This credit score may not be enough to get approved at a reasonable interest rate, though, depending on the specific kind of loan you want.
The interest rate and payback period for a loan usually depend on your credit score, which in turn depends on your credit history. For example, it’s unlikely that someone with less than one year of credit history would qualify for a 30-year mortgage.
Keep in mind that a single credit score doesn’t last forever. You must continue to prove your creditworthiness by paying your debts on time and making at least the minimum payment due. This means that even with years of credit history, if you close all lines of credit and pay off all debts, you might return to an insufficient credit history status, although many items can stay on your report for up to 10 years.
How to Build Credit History
Unfortunately, there are no quick fixes for insufficient credit history. The only way to build trust with lenders is to make consistent payments on your debts over time.
The best way to fix insufficient credit history is to start building your credit now. A secured credit card, for example, allows you to build credit without taking any of the risk associated with borrowing money. You must maintain responsible purchasing habits and make regular payments to prove your creditworthiness.
When your credit history is insufficient, there are some strategies to proactively build credit and work toward a higher credit score. Although there is no way to speed up the process of credit history, follow these steps to build a better history of creditworthiness.
1. Review Your Credit Report for Errors
According to FICO, a study by the FTC discovered that 26 percent of people have had at least one error on their credit report. If you have a lower than anticipated credit score or none at all, review your credit report and dispute any errors with the credit bureaus. This is where a credit repair company can potentially help you.
If you’re deemed to have insufficient credit history, but you believe you have established credit, first consider whether it’s been more than six months since you last paid a debt in case your credit history has lapsed. Otherwise, confirm that all personally identifiable information (such as your legal name, Social Security number and driver’s license number) is accurate on your loan application.
If your legal name is even slightly misspelled or is missing a suffix (Jr., Sr., I, II, III, etc.), your credit report could be incorrect.
2. Get a Secure Credit Card
If you have no credit and therefore no credit history, you will find it difficult to get approved for a loan. Instead, you should consider secure credit cards as a stepping stone to getting more credit.
Secure credit cards are backed by a cash deposit instead of your promise to pay the lender back (i.e., credit). Once you have made good on your promises to pay back all purchases and interest charges on your secured credit card, you can transition to an unsecured credit card. The unsecured credit card is usually when your credit history begins, and six months later, you will likely have a credit score.
3. Pay Your Bills on Time
Since between 35 percent and 40 percent of your credit score is calculated based on your payment history, you should be diligent about paying your bills on time and in full. Anyone that extends you credit, in the form of debt, expects to be paid back at regular intervals and for at least the minimum amount due. Late or incomplete payments may negatively affect your future credit score.
4. Maintain or Reduce Debt-to-Income Ratio
With 30 percent of your credit score depending on the amount you owe to lenders, maintaining a healthy debt-to-income ratio is recommended. If possible, pay off balances every month instead of building up debt levels that become unsustainable.
As you now know, establishing credit and credit history is important, but the work doesn’t end there. It’s essential to monitor, maintain and, if needed, proactively work to boost your credit score. Late payments, collections, defaults, and bankruptcies can have a negative impact on your credit report for as long as 10 years. If you feel your credit score does not accurately reflect your credit history and creditworthiness, the credit repair services offered by Lexington Law can help you dispute inaccurate negative items on your report. Learn more about this possibility today.
Reviewed by Daniel Woolston, an Assistant Managing Attorney at Lexington Law Firm. Written by Lexington Law.
Daniel Woolston is the Assistant Managing Attorney in the Arizona office. Mr. Woolston was born in Houston, Texas and raised in Sugar Land, Texas. He received his B.S. in Political Science at Brigham Young University and his Juris Doctorate at Arizona State University. After graduation, Mr. Woolston worked as a misdemeanor and felony prosecutor in Arizona. He has conducted numerous jury trials and hundreds of other court hearings. While at Lexington Law Firm, Mr. Woolston dedicates his time to training paralegals and attorneys in credit repair, problem solving, and ethical and legal compliance. Daniel is licensed to practice law in Arizona, Oklahoma, and Nevada. He is located in the Phoenix office.
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