When one attains the age of 18 and has no credit, then they begin by having a credit rating of zero. Basically, without a credit score, most lenders deem you a ‘credit invisible’ consumer. This just means that you do not have sufficient records and data that are reported by various credit providers for the credit bureaus to determine your creditworthiness.
Then the question arises and perhaps the reason you are here now; how does one shift from having no credit to having good credit? This means that credit is not built within a short period but through good credit practices. It is very possible to create and build credit in the late teen ages and up to the mid-twenties if some certain right steps are taken.
Starting from Zero
When people apply for the first credit card or loan, there is no way lenders know whether the particular applicant will be able to make timely payments and handle credit obligations properly. With no credit history, people view you as a credit risk even when you are determined to be creditworthy.
If you have no credit score, most of the financial institutions will assume that you are a subprime borrower. You will either be rejected a line of credit or be charged even higher interest rates and fees. Constructing that first element of positive history is the most challenging task.
You begin with no credit score because the most used credit scoring models require at least one open account to have been reported to the credit bureaus within the last 6 months. This implies that for a score to be produced, you must have a credit account that is currently open and active.
FICO Scores
More than 90% of lenders rely on FICO scores to assess credit risk for each credit decision. The modern FICO scoring models employ a range from 300 to 850. Therefore when no accounts are reported, there is no score.
Here’s how the score distribution looks for consumers with FICO scores: Here’s how the score distribution looks for consumers with FICO scores:
800-850 Extremely Good 740-799 Very Good 670-739 Good 580-669 Fair Under 580 Poor
VantageScores
The VantageScore credit scoring model employs a range of 300 to 850. More than 2 billion scores are calculated using VantageScore each year and it ranks as the second most used credit scoring model.
The score distribution categories are slightly different with VantageScore: The score distribution categories are slightly different with VantageScore:
781-850 Excellent 661-780 Good 601-660 Fair 500-600 Poor 300-499 Very Poor
Without accounts reporting, you have no VantageScore at all.
Building Credit from Scratch
Starting with no credit, the best way to build a credit history is to open two credit cards for yourself. At least one must be a large credit card. This generally refers to a Visa, Mastercard, American Express, or Discover credit or debit card.
Applying for credit cards that you are likely to qualify for with little or no credit backing. On average, retail store cards are easier to get approved for. Another advantage of secured credit cards is that the chances of approval are better because the credit limit is equal to a refundable cash deposit that is paid initially.
When one has been approved, use the cards sparingly, and ensure to pay the statement balances in full and on time. Using less than 30% of the credit limits is even more helpful. The absence of timely payments is the strongest act that lowers credit scores.
Including a credit builder loan or reporting authorized user accounts can also help to build your credit file within a short period. On the positive side, any account that is reported and paid on time contributes to raising your credit scores so long as there are no late payments or balances.
FICO Score With No Credit History
The three most frequently used FICO versions will not be able to generate a score if you have no accounts reporting. If you do not have at least one account opened in your name within the past 6 months, you do not have a score.
The moment one credit card, loan, or collection account reports to the bureaus, you will start creating credit scores.
FICO 8, the model most lenders check, requires: FICO 8, the model most lenders check, requires:
- There should be at least one account in your name
- Business activity within the last six months
- One active account which has been active for at least six months.
Data from FICO shows that the first time a FICO Score is generated, 67% of consumers are likely to have a FICO Score of 637 or above. Thus, the majority of people begin with the percentage values greater than 300 and lower than 850.
Most of the lending companies consider scores over 670 as good credit and scores over 700 as excellent for the lowest rates.
What Further Steps Should Be Taken After Being Approved: Tips For Using Your First Credit Card
After five to six months of responsible use of the first credit card, get a second credit card with a very small line of credit. One should wait for at least three months, before applying for the loan again if they are rejected. Sometimes, a large number of applications can reduce the scores slightly.
If you have been making your payments on time and keeping your balances low on both cards for an entire year, you can ask the credit card company for a credit limit increase. More credit limits with the same good payment history improve credit standing even more.
Next, one can take an installment loan, and then pay that on time as well. Car loans, education loans, and signature loans form a good credit mix.
It might be helpful to try to start paying credit card balances in full before the due dates. Transparency decreases scores by paying interest charges every month. It also affects your financial plan. Avoid interest charges wherever and whenever possible.
Other options include becoming an authorized user on someone else’s credit card. That is why the fact of being an authorized user creates a positive history if the primary user pays on time.
Never close any accounts, even if the balance is zeroed out in any of them. Using credit cards longer gives you a longer credit history. Not having high balances and/or credit limits, and having available credit all aid scores. However, you can request that a newer card that is not often used be canceled.
Monitor Credit Reports
After opening your first credit account, you need to periodically review your credit reports with Equifax, Experian, and TransUnion. Be sure to report new accounts and on-time payments. Report and resolve any errors or fraudulent accounts as soon as possible to avoid affecting scores and lending.
How Much Can Credit Score Increase
The rate at which a positive credit score affects them differs from one situation to another. In general, expect to wait at least: In general, expect to wait at least:
It takes about 3-6 months for a new account to be able to start producing scores. It takes up to 6 months of on-time payments for the impact of a late payment to be reversed. 1-2 years for your scores to become sufficiently good through the practice of good habits 7-10 years for negative marks to stop lowering your scores These credit scores may initially begin in the 600s and then climb to the very good 700s after a couple of years and then go over 800 with long credit histories. As one progresses to the next level, it becomes more challenging to make even more improvements.
If the first score is low, then there are always habits that one can practice responsibly and keep on seeing the score rise. Check your reports regularly, avoid having high balances, make payments on time, and be persistent. In as early as five years, by effective use of smart credit, your credit status will transition from the fair category to the excellent category.
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