No credit score? You’re not alone. 20% of adults in the U.S. don’t have a credit score. This statistic may not sound all that meaningful, but not having a credit score is sometimes just as bad as having a terrible credit score. And as we know, someone with terrible credit usually pays more for almost everything, faces many loan denials, and usually lives a less desirable life.
According to a recent study by the Consumer Financial Protection Bureau (CFPB), nearly 1 in 5 adults don’t have a credit score (more below). The good news is, it only takes a few easy steps to get a score.
Payment history significantly impacts the credit score. If you have a loan, credit card, or utility account, chances are that the creditor reports the data to the 3 credit reporting agencies (CRAs) – Equifax, Experian and TransUnion. In fact, payment history is the primary contributing factor in the credit score formula, especially any history within the last 2 years. Some consumers simply don’t have a score because they don’t have any recent, on-time payment history. No worries though; it’s fairly easy to generate a score. Here’s how: (a) open an account with a creditor who reports to the 3 credit reporting agencies, and (b) make on-time payments for 6 consecutive months. This opens the door to obtaining other types of credit and financing. But don’t just go out and apply for a new credit card just yet!
Before you do anything, you should check out your credit report first. Why? You may have credit history reporting already – past accounts you haven’t thought of. Also, there may be errors showing on your report that you will want to address, including any accounts that aren’t reporting correct information. Errors in credit reports are more common than you think. Finally, if there’s any derogatory information reporting, such as collections, judgments, tax liens or past charge offs, you will want to address these too. That way, when you do generate a score, it’s a good one.
Deal With Your Derogatory Accounts
There are several ways you can get copies of your credit reports – and some of them are free. You can go online and get your free reports at Credit Karma or at AnnualCreditReport.com (or call 877-322-8228). If you’ve been denied credit in the past 60 days, call and request a free credit report from each CRA. They will mail it to you in about a week. TransUnion (800-888-4213), Equifax (800-685-1111), Experian (888-397-3742).
One of our customers reached out to us because he didn’t have any credit scores. He wanted to buy a home, but mortgage financing required at least 2 scores. He was confused because when he looked at his own credit report, he saw that he did have some payment history reporting. We told him the problem was that the history was from several years ago; plus, he didn’t have any current, open accounts. He also had several collections and some late payments reporting from over 3 years ago.
With no open accounts reporting, we recommended that he do two things; (1) obtain a secured credit card, and (2) open a CD-secured installment loan. The banks and credit unions who provide this type of installment loan usually refer to it as a “credit-builder” loan, as it’s designed to help people establish good credit.
He took our advice and opened the 2 different accounts. We also told him it would take 6 months before a score would generate; however, he started looking for houses, and in 3 months he found a home he really liked. Worried that he would miss out on the opportunity, he contacted his loan officer to see if he had credit scores high enough to qualify for a mortgage. The loan officer figured he’d give it a try since he had nothing to lose. No surprise….still no scores.
After telling us about his recent score check, we reassured him that he only had a 3 more months to wait. Meanwhile, we were able to get the majority of his derogatory information removed from the credit report. (How?) And sure enough, after 6 months had passed, the loan officer pulled credit and found the scores were high enough to qualify.
Consumers who need scores but don’t have any derogatory accounts just need 6 months of reported payment history to generate good scores. However, consumers who need scores but have derogatory information (e.g., collections, charge-offs, etc.) may need to address it at the same time as building positive payment history. Otherwise, any newly generated scores will be lowered because of the derogatory information.
A Faster Option: Get added as a joint owner or authorized user on someone else’s existing credit card or utility account. However, before you add yourself to any account, make sure it has at least 6 months of positive (non-derogatory) payment history.
Consumers achieve great credit scores by making all of their payments on time. The following methods will help you achieve better credit; however, paying late will result in lower scores….once a score is generated.
For consumers that don’t have any recent payment history (within the last 2 years), we usually recommend establishing more than one account. Reason being: credit score formulas give a boost to your score for having several, open reporting accounts. The biggest category in any credit scoring formula is “payment history,” accounting for up to 35% of the credit score. According to Fair Isaac Corporation (FICO) – the creator of most commonly used credit score formulas, the total number of open accounts makes up part of the “payment history” category. For this reason, we recommend maintaining four or more open accounts to achieve higher scores. Think of it this way: your credit score is a measurement of your ability to make payments on time. Having numerous accounts with many on-time payments demonstrates that you’re a good credit risk, as opposed to having just one account reporting. Here’s some ways you can start establishing good credit:
Open a secured credit card. Most secured credit cards report to all 3 credit reporting agencies, but you’ll want to make sure. Secured credit cards are a good option for people who can’t get approved for a regular credit card. How it works: prior to opening the card, a monetary deposit is required; this deposit secures (or backs) the credit line of the card . This deposit serves as collateral for the creditor’s benefit, in case you default. So, if you deposit $300 with a bank or card company, you’ll get a secured credit card with a maximum limit of $300. As you use the card and make payments, you establish a payment history.
3 other tips for credit cards: (1) Remember to keep your credit card balances below 30% of the credit limit in order to avoid a high debt usage ratio, which penalizes scores. (2) You don’t need to carry a balance in order for the creditor to report to the 3 CRAs. (3) You don’t need to use the card every single month (use it every 3 months so the card company doesn’t close it for inactivity).
According to a study done by the CFPB, about 45 million consumers were considered “unscorable” as of 2010. More recent data from Fair Isaac Corporation (FICO) suggests that now the number might be closer to 53 million consumers (according to an October 2015 article in the Wall Street Journal). That’s nearly 20% of the U.S. adult population!
Reasons You May Not Have a Credit Score
You are reported as deceased. While this is rare, it does happen. There are two ways this can happen. (a) Having a joint account with someone that is deceased. (b) Having the same name as a parent or child who’s deceased. If you are being reported as deceased, simply send all three CRAs a certified letter that is either notarized or bank-signature-guaranteed stating that you are indeed still alive…and include copies of a recent bank and/or utility account statement, updated photo ID, and copy of your social security card.
Insufficient Reporting: According to FICO (the creator of credit score formulas used by most banks) you need to have at least one account that has been open for 6 months or more. In our experience we have found that you need to have an account open and active with payment history for at least 6 months within the past 2 years. The history doesn’t have to be on the same account, but there needs to be 6 months of history sometime within the past 2 years and an open account currently reporting.
If the only payment history on the report is from accounts that have been closed beyond 2 years, then this history is considered “stale” or “insufficient”. It’s important to know that the exact definition of what constitutes “insufficient” or “stale” information differs across credit scoring models, as each model uses its own proprietary definition. (Source: CFPB Data Point: Credit Invisibles)
In other words, different scoring formulas give different results. The mortgage financing and consumer financing industries use FICO-based credit scoring formulas that won’t generate a score if there’s stale credit history. On the other hand, credit card issuers use a wide range of scoring formulas (4 quick tips on scores), including FICO formulas that may not generate a score when credit history is scant. Meanwhile, scores purchased from online sources usually always generate a credit score, unless there is absolutely no credit history on the credit report. It’s important to know that lenders use different scoring formulas than the ones used by online credit report websites.
In 2014, FICO created a new credit scoring formula called FICO XD. This new formula was designed to create scores for those who currently have no scores due to insufficient reporting credit history. Since late 2014, twelve of the nation’s largest credit card companies have been testing the new scoring model on a pilot program – using it only when applicants don’t generate a credit score from the current formulas.
According to FICO, over ⅓ of the people who currently have no score with traditional scoring formulas would score a 620 or higher with the new FICO XD, a minimum threshold for lending among many banks. “The XD score runs from 300 to 850, the same range as traditional FICO scores, and a 620 on the XD scale equals a traditional FICO score of 620”, says Jim Wehmann, executive vice president of scores at FICO. He goes on to say, “Borrowers with an XD score who receive a credit card and pay their bills on time for at least six months will then receive regular FICO scores, making it easier to get other types of loans including mortgages.”