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It's the ultimate Catch-22: You can't get credit if you don't have a credit score, but you can't get a credit score if you have no credit. There is some good news, though. While qualifying for new credit without any credit history or credit scores can be difficult, it is not impossible. There are ways to access credit while you are just starting on your credit journey.
What Is a Credit Score?
Understanding what a credit score is, is important because lenders, credit card issuers and car dealers use these scores to decide whether to approve you for a credit card or loan. A credit score is a three-digit number that's calculated by applying a mathematical algorithm to the information in one of your three credit reports, which are generally updated each month. Your credit report includes all the credit accounts you've opened, as well as your payment history with these accounts.
Credit scores fall into a range. While there are many different credit-scoring models, the FICO® Score is one of the most commonly used. FICO® scores range between 300 and 850. A score of 700 or above is generally considered good, while a score of 800 or above is considered excellent. Most credit scores, however, fall between 600 and 750.
Why Don't I Have a Credit Score?
A person may not have a credit score for many reasons, but usually, it's the result of having a "thin credit file." A thin credit file means having very few—typically four or fewer—credit accounts listed on a credit report. Banks and other lenders can't calculate a credit score from a thin file because there is not enough information in a user's credit history to do so. You might have a thin file if you are young and haven't established any credit, or if you recently moved to the United States from another country.
Another reason you may not have a credit score is that there is not much activity on your credit reports. Maybe you haven't applied for any new credit for a long time, or you have haven't used any of your credit cards in more than six months. Most credit scoring models pay attention to recent or current credit activity, so be sure to use your cards once in a while, even if you're just charging a small amount and paying it off right away. (And remember, debit card activity is not reported on your credit reports.)
Not having a credit score can lock you out of traditional, low-cost credit products and other financial resources. Without these options, many feel that their only choice is to turn to payday loans, car title loans or rent-to-own businesses, which can trap them in a cycle of high-cost debt. Here's the good news: It is possible to be approved for new credit without a credit score.
What Are My Credit Options with No Credit Score?
Credit options for people with no credit score do exist—you just need to know where to look. Here are five options to consider if you need help building your credit:
- Secured credit cards are credit cards that require you to deposit your own money as collateral for the card. That deposit usually serves as your credit limit. So if you deposit $300, for example, you can spend up to that amount on the card. Secured credit cards might be right for you if you have a limited credit history and are looking to build your credit.
- Credit builder loans are loans in which the lender holds the total loan amounts in a savings account while you make payments on it. Once you've paid off the credit builder loan, you receive access to the funds.
- Store credit cards, or retail cards, are credit cards offered by a retailer. Usually, such cards can only be used to buy things at that store. Store credit cards also typically come with a lower credit limit and a higher annual percentage rate than other credit cards.
- Authorized users can be added to a credit card account, which allows them to use the credit card but not be the primary responsible party for making payments on the account. Becoming an authorized user can help you start building credit, but you need to make sure that creditors report your authorized user account to the credit reporting agencies. You can become an authorized user by asking a family member to add you to their credit card account.
- Cosigning is when someone, usually a relative or friend, cosigns a loan to help you establish a credit history. The consigner must have strong credit scores, and they are likely able to qualify for better interest rates and credit terms than you would have yourself. Cosigning can have risks, especially if you fail to make payments on the loan, which can affect both of your credit scores as a result.
Experian Boost Can Help
There will soon be a way for you to improve your credit scores by factoring in previously uncounted payments, such as utility and cell phone bills, through a new, free platform called Experian Boost.
Through this new opt-in platform, consumers will be able to allow Experian to connect to their bank accounts to identify utility and telecom payment history. After a consumer verifies the data and confirms they want it added to their Experian credit file, an updated FICO® Score will be delivered in real time.
Experian Boost will be available in early 2019, but you can visit experian.com/boost now to register for early access. By signing up for a free Experian membership, you will receive a free credit report and FICO® Score immediately and will be one of the first to experience Experian Boost.
You have options if you are just starting to build your credit. Being approved is the first step, but managing your credit well is the next and most important step during your lifetime. Credit reports reflect your credit history and help lenders decide if they can trust that you will manage your debts over time. If you don't pay your debts on time, you will lose that trust and your credit score may suffer. Monitor your credit report for free using the Experian Financial Profile tool.
Want to instantly increase your credit score? Experian Boost™ will be available in early 2019 and helps by giving you extra credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service will be completely free and can boost your credit score fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.