By Tom Quinn
While having a credit score won’t solve all your problems, it can certainly make your life a bit easier when it comes to financing a new car, purchasing a home, securing cell phone service or getting a line increase on your credit card. Obviously, it really helps if your score also shows that you’re a low credit risk!
While the majority of U.S. consumers above the age of 18 have a credit score, there are millions of people who don’t have a credit report or credit score. For example, young people who are just entering the credit market, recent immigrants to the U.S., consumers who opt to use cash or other non-credit payment options and people who are not recently active with their credit. While no one knows the exact number of consumers who don’t have a credit score, estimates range from 30 to 50 million people. That’s a lot of people who—either by choice or circumstance—fall outside of our “mainstream” credit system.
While the exact criteria required to have a credit score varies by the different credit scoring systems used, all require some degree of credit history on a credit report in order to generate a score that is predictive of a consumer’s future credit risk. For a FICO score to be generated, a credit report must contain at least one credit obligation that has been open for 6 months or longer and has been updated/reported on in the last 6 months (and no deceased status on your report).
For example, under this criteria, a person with just one credit account (a Sears credit card, for example) that was opened 8 months ago and updated (or reported on) two months ago would meet the minimum criteria required to be scored. Conversely, a person with 15 credit accounts that have been paid off with the most recent activity being reported 10 months ago would not meet the minimum scoring criteria—and would, therefore, not have a score.
For consumers who have existing credit, this is why it is important to use it periodically. For example, make a small purchase using an existing credit card and pay if off in full when the bill is due. That way, you can maintain your credit score should you need credit in the near future.
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The process is a bit more challenging for consumers who have no credit history. It’s a “catch-22,” in which you need to have credit to be able to get it. So here are a few tips on how to establish credit:
- Credit unions, as they are membership-based, may offer products and services and/or special programs designed to help members who are new to credit.
- Many banks offer secured credit cards. This is where the available credit line (or portion of that credit line) is secured against a deposit that you’ve provided. These secured cards are usually reported to the credit bureaus just like a regular credit card (be sure to confirm this with the bank before signing up). As it is reported, it will help you build your credit history.
- Ask a family member or friend to co-sign or be a co-applicant with you on a loan or line of credit. Once approved by the lender, it will be reported on both applicants’ credit files. There is a big caveat to this approach, however. You want to make sure their credit is good (it needs to be if the lender is to approve the request for credit), and remember both parties will be liable for the payment of the credit if it is granted. This means if you manage the account poorly, your co-signer’s credit will suffer as well as your own.
- Ask a family member or friend to place you as an authorised user on their credit card account. Once approved by the lender, the history and activity of that credit card will be reported on both of you to the credit bureaus. Again, enter into these relationships carefully as you want to make sure they are paying as agreed/carry low balances on that credit card. Also note, any negative information on that card (historical or in the future) will be provided to the credit bureaus and could negatively impact your score.
Your credit score is an important part of your “credit DNA”—don’t take it for granted.
Tom Quinn is an industry insider and Consumer Credit Expert for Credit.com. Formerly with FICO (Fair Isaac), MDS (currently Experian) and Citibank, Tom carries more than 20 years of behind the scenes experience within the credit industry. Tom shares his invaluable insight and knowledge to help consumers navigate and understand the often complicated world of credit scoring, credit reporting and credit granting industry practices.