When purchasing using credit, your credit score dictates a big part of how you can spend your money. Most people understand that high credit scores come with more benefits and that low credit scores limit how much you can buy or loan. But what happens when you don’t have a credit score at all?
A report by the Consumer Financial Protection Bureau shows that 26 million Americans are “credit invisible,” with an additional 19 million described as “unscorable.” These individuals don’t have enough credit-union or bank accounts to be scored by today’s standards.
If you’re someone without a credit score, then here’s what you need to know and the steps you can take:
Why Credit History is So Important
Your credit history takes into account factors such as your borrowing history, total levels of debt, repayment history, and others. Lenders will use the credit score based on this to evaluate whether you’ll pay back borrowed money in a timely manner or not, and this affects how much you can loan.
Why You Don’t Have a Credit Score
There are also situations wherein people don’t have a credit score. That does not automatically equate to having bad credit, which happens when the credit user has a history of missed payments, defaults on loans, or exhibits other behaviors that can lead to a poor credit score. Not having a score is more due to little or no credit activity, so credit bureaus have no data to generate a score.
This could be due to several reasons. New credit users have not yet had enough time to build up their score, while those who have been using credit for a while may not have used it recently. In both cases, there is insufficient data to generate a score. Sometimes, the lender may not even report your activity to credit bureaus, resulting in no score even if you’ve used your credit card in the past few months.
How to Build Your Credit Score
Pay Your Bills on Time
The most influential factor in your credit score is your payment history, so be sure to pay your bills before the due date every single time. This requires consistency since it takes about six months of on-time payments to see a noticeable difference in your credit score. A previous feature by Carl Fox explains how adding telecommunications and utility bills to your credit file can also help boost your score.
Become an Authorized User
One of the easiest ways to start building credit is to become an authorized user of another person’s credit card, preferably someone with an exceptional credit score. Petal Card’s guide to building credit if you don’t have any, explains how this arrangement requires coordination since you won’t be solely responsible for paying the bills. You can also reassure the original cardholder that you won’t need the physical card to spend on. Lastly, make sure you pair up with somebody who is consistent with their payments.
Diversify Your Debt
Rather than depending on revolving debt products (like credit cards), you can diversify your debt by applying for a loan so creditors can see your ability to pay different debts over time. A CNBC feature on good and bad debt details how for any loan (like mortgages or student loans), the final consideration should be whether the debt is beneficial. If you can pay the monthly dues and if the debt benefits you in the long run, then it is a worthwhile investment that can help you diversify your debt and improve your credit score.
The Bottom Line: Credit Scores Matter
While it seems like a lot to go through, credit scores are ultimately helpful measures that prevent borrowers from biting off more than they can chew. It’s crucial that you take steps to rebuild your credit score if it is low, or try to establish one in the first place.