BY DANA DRATCH
Limited or no credit? You’re in good company.
The Consumer Financial Protection Bureau says 1 in 10 adults is “credit invisible,” meaning they have no established credit with a nationwide reporting agency. Another 8 percent have insufficient credit history or one that’s too old to track.
Many times, consumers with no credit history are new to the world of credit. They can find themselves in a Catch-22 scenario, says Jennifer Tescher, president and CEO of the Center for Financial Services Innovation in Chicago.
“You need to have a credit history to get credit,” she says. “And you need to have credit to build (a) credit history,” she says.
A “thin file” means you don’t have much of a track record with credit. Either you have only a few accounts, your credit is relatively new, or both. These consumers may be unable to qualify for unsecured credit cards or “instant” in-store accounts,
If you have limited or no credit, here are six strategies you can follow to establish, re-establish or beef up your credit file.
DON’T GO CRAZY WITH THE CREDIT APPLICATIONS
Some of the groups at risk for no credit or a thin file include young adults, the elderly (if they haven’t used credit in a while), new immigrants and people who avoid credit.
Working to establish credit? Go slow, be very selective in your applications and nurture existing accounts. Never pay late, and — with credit cards — keep balances reasonable.
Filling out multiple applications could hurt your credit — and raise red flags with card issuers.
LOOK TO A SECURED CREDIT CARD
Your thin credit history may not be robust enough for you to qualify for an unsecured credit card.
One solution to build credit: a secured credit card, which requires a cash deposit that then becomes your credit limit.
Beware of cards that come with a bunch of charges, like application fees, annual fees and maintenance fees. Good secured cards exist — even ones that pay rewards.
Make sure you opt for a credit card that reports your on-time payments to the three major credit bureaus — Equifax, Experian and TransUnion. Some cards don’t report or only report if the account goes into collections.
If you’re looking to build good credit, you need a credit card that will tell the bureaus all about your good habits.
BUY SOMETHING SMALL
While most negative information comes off your credit report after seven years, even the good accounts can disappear after 10 years if they’ve been closed or inactive. In addition, some scoring formulas can’t generate a credit score if it’s been awhile since any of your creditors reported to the bureaus.
That means some people who had robust credit files at one time could potentially find themselves with a thin file or no credit score if they close accounts or stop using credit.
If you have a history of credit but no longer have a score, make a small purchase on one of your existing accounts and pay it off right away.
That will give you the recent activity the scoring formula needs to assign you a score.
If you’re new to the credit game, it could take a while to get a credit score, depending on the scoring model used to compute it. For a FICO score, your oldest account needs to be at least six months old. Using the VantageScore model, a consumer’s credit report could be scored after the first month of paying on a credit account.
BECOME AN AUTHORIZED USER
This strategy can be chancy for the authorized user and the primary cardholder.
In the perfect scenario, the authorized user gets charging privileges on another person’s credit card, stays within whatever limits the cardholder sets and the cardholder’s good payment history for that account appears on the authorized user’s credit record.
The gamble if you’re the authorized user: If the account holder misses payments, goes into collections or declares bankruptcy, that bad behavior can also land on your credit report.
Before you attempt this arrangement, find out from the issuer if you have the power to remove yourself from the account. Also, ask the issuer what would happen to account information — good or bad — that’s already on your report if you’re no longer an authorized user.
If you become an authorized user, monitor your credit report regularly to ensure the account is reporting and paid on time.
The gamble if you’re the primary account holder: The authorized user could max out the card and leave you with the bill.
One possible solution: If you want to add an authorized user, don’t give that person a card.
A ‘CREDIT BUILDER’ LOAN
This product is very similar to a secured card, except that it’s in the form of a loan.
One example: Your bank makes you a small loan, which you use to purchase a CD. The bank holds the CD, and you make monthly payments. At the end of your loan, you own the CD. Your gain: a small nest egg, plus a record of good credit.
The price: any fees and interest you pay on the loan.
Paying for money you don’t need can be counterproductive — the point of good credit is to save money — so reserve this step as a last resort. If you use it, look for low rates, minimal fees and a lender that reports good behavior.
ASK QUESTIONS BEFORE YOU APPLY
With little or no credit, consider talking to lenders before you apply.
Some lenders have access to services that pull data from other sources for people in just your situation, Tescher says.
These services help lenders identify potential customers by analyzing data from nontraditional sources — such as rental or utility records — when potential customers don’t make the cut based on traditional data, she says.
While seeking lenders who consider this information won’t change your “classic” FICO score, it could help you get credit.
Ask before you apply: If your conventional credit score or application doesn’t make the grade, does the lender have a way of considering any additional data to underwrite you for credit?