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Having no credit history is different from having a damaged history, but both situations can make obtaining loans and credit cards difficult. Bad credit can be more challenging to overcome than unestablished credit, but plenty of remedies exist. The good news is you can create a positive credit history no matter where your credit is today. Read on to find out how.
What's the Difference Between No Credit and Bad Credit?
Having no credit means you've never taken out a loan or credit card and thus don't have a consumer credit report. When you borrow money from a financial institution or get a credit card, your credit history will begin. The company will provide your account activity to at least one of the three major credit reporting agencies (Experian, TransUnion and Equifax), which will then create a credit report in your name.
The information on your credit report will depend on what type of credit you have. Loans will show the original amount you borrowed, while credit card accounts will show the available limit and balance. For both loans and credit cards, you'll see the date you applied, the date credit was granted, and your monthly payment pattern. A credit scoring company such as FICO will then take the data from your credit report, put it into a mathematical model designed to predict credit risk, and transform it into a numerical score, typically from 300 to 850.
Without a traceable credit history or credit score, a lender has no way of knowing what kind of credit risk you present. While you may not have proven yourself to be irresponsible, you haven't demonstrated that you're responsible either. You're an unknown quantity to lenders.
Bad credit is the opposite. It's a verifiable indication that something went wrong in your credit history. It could be evidence that you paid your bills late or acquired a large amount of debt relative to the amount available. Maybe you defaulted on accounts and are experiencing collection activity, or have filed for bankruptcy. Negative information on your credit report will be calculated into your credit scores, causing them to drop.
To turn no credit into great credit, you'll just need to populate your credit report with positive information. To recover from bad credit, however, you'll need to make positive changes that can help you improve your credit over time.
How to Build Credit When You Have None
Obtaining a credit product, such as a loan or credit card, in your name is the swiftest way to begin a credit history. As an unknown risk, you can inspire confidence by offering collateral. Secured credit cards and credit-builder loans are ideal for people who are credit mysteries and can put down a deposit to begin establishing credit.
With a secured credit card, you provide a cash deposit to the issuer, then receive a credit card with a limit that typically matches your deposit. The issuer can claim the funds held in deposit if you don't pay your balance. As long as you manage the card well by using it often and paying the balance in full by the due date every month, you'll add positive data to your credit report.
Credit-builder loans are also secured by a cash deposit. You repay the loan in regular installments, which the lender reports to the credit reporting agencies. After the loan is paid in full, you will get your deposit back and your credit report will indicate a many months' worth of timely payments.
Not everyone can afford to put down a deposit for a secured credit card or credit-builder loan. That doesn't mean you're out of luck, though. Here are other ways to build credit:
- Become an authorized user. If you know someone who has a good credit history and will add you to their credit card as an authorized user, that account will show up on your credit report. As long as the primary account holder keeps the balance low and always pays on time, this can help jump-start your credit history. Because the account is not in your name, the primary user is responsible for all payments.
- Find a cosigner. Perhaps a person with a positive credit rating will open a credit card or loan with you. Because you would share ownership, you would be equally liable for the account. If you renege, the creditor can pursue one or both of you for payment.
- Apply for an unsecured credit card. Some credit card issuers are willing to grant credit newbies a small credit line without requiring a security deposit. If you manage it well, the issuer may increase the credit line.
- Obtain a student loan. You don't need any kind of credit history to qualify for federal student loans. If you're in college and need to borrow for tuition and other essential expenses, a student loan can be beneficial. The loan will appear on your credit report, and even when you're not in repayment, it will help your credit history and credit mix. Your credit may escalate more when you start to send payments and lower the loan balance.
- Consider a nonprofit lender. If your income is low and other alternatives don't pan out, you may be able to get financing and start your credit history by participating in a nonprofit lending circle. Organizations such as Mission Asset Fund offer low-rate loans and report your borrowing and repaying activity to the credit reporting agencies.
How to Improve Your Bad Credit
To overcome past credit problems, you'll need to know what exactly you must correct. Obtain a copy of your credit report and read it carefully. Identify areas of concern, then tackle any problems. You can't remove accurate and timely information from your credit report, but you can change the future.
- Pay all bills on time. A slew of missed payments will definitely drag down your credit. From this moment forward, send all payments on time. If you stopped using credit cards and don't owe any money, start charging again in small increments. Begin charging an affordable expense, such as a monthly subscription, and pay it off each month. The more on-time payments you have on your credit report, the better, since payment history is the most important factor in your credit score calculation.
- Keep balances low. Your credit utilization rate, or how much available credit you're using, is another important factor affecting your credit scores. Keep credit card debt well below 30% of your credit limit. Eventually consider adding more credit cards to your portfolio and keep those lines open while using the cards responsibly. Doing so will help keep your utilization low and may cause your credit scores to escalate.
- Pay off any unsettled collection accounts. You can't remove evidence that a debt went into collections, but you can pay it off. A satisfied debt always looks better than one that is outstanding, so delete it so it shows as paid in full.
If you filed for bankruptcy, you will have to wait it out. A Chapter 7 will appear on your report for 10 years, and a Chapter 13 will stay for seven. During this time, add positive activity to your reports using the strategies above to offset the damage. The same rules for establishing good credit apply: Get a healthy mix of loans and credit cards, use them frequently, pay on time and maintain low balances.
Whether you're establishing credit or dealing with damaged credit, take advantage of an opportunity to add your utility and cellphone accounts to your credit reports with Experian Boost™† . The free service offers an easy way to make sure that on-time payments work in your favor. Combined with other positive credit habits, Experian Boost can help you establish credit or improve bad credit.