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Your credit score is an assessment of your creditworthiness and how likely you are to repay your debt obligations. Lenders use it when evaluating you for financing, such as credit cards, mortgages and other loans. But what happens if you don’t have a credit score? Does that mean your finances are permanently ruined? Not quite.
Read on to learn what it means to have no credit score means and how you can build one for the first time.
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Pros & Cons
- No hard credit pull for the card¹ or Credit Builder Account²
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- Your security deposit is what’s in your Credit Builder Account
- Annual fee charged
- It can be confusing to know what credit builder plan to pick
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- 29.24% variable APR on purchases
- $25 annual fee
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Credit Score ranges are based on FICO® credit scoring. This is just one scoring method and a credit card issuer may use another method when considering your application. These are provided as guidelines only and approval is not guaranteed.
What Is a Credit Score?
A credit score is a three-digit numerical rating that the three credit bureaus—Experian, Equifax and TransUnion—assign to a consumer. The numbers represent how creditworthy a person is as a borrower. Further, lenders typically use an applicant’s score to determine the terms of a new credit account, such as the interest rate, term length and any other additional fees like origination fees.
FICO and VantageScore are the two credit scoring models, with FICO being the most common. Both scoring models range from 300 to 850. The higher the credit score, the more likely it is that the borrower will repay their debt on time. A person with a low credit score is more likely to default on a loan or make late payments.
What It Means to Have No Credit Score
When you have no credit score, it means that you’ve never opened a credit account, like a loan or credit card. Young adults often don’t have a credit score because they don’t have any credit in their name.
Unfortunately, having no credit is like a catch-22 situation. When you don’t have any credit, it’s likely you won’t qualify for a loan or credit card. However, you can’t build credit without opening a new credit account. We will guide you through steps you can take to build credit for the first time.
Related: How To Build Credit At 18: 7 Expert-Proven Tips
No Credit Vs. Bad Credit
Having no credit is not the same as having bad credit. Bad credit refers to a score below a certain threshold—580 or lower. If you have bad credit, it means you likely had several late payments, defaulted on a loan or declared bankruptcy at some point. In some cases, it may be easier to build a good credit score from scratch than to fix a bad credit score.
Related: How To Improve Your Credit Score
Why Credit Scores Are Important
Your credit score serves as your keys to not only financial products like credit cards and loans, but also rental properties as a tenant. Both lenders and landlords will typically run a credit check before considering your application. If you don’t have credit, they may require you to use a co-signer or co-borrower.
Some utility and cell phone companies also run a credit check and may require a deposit if you don’t have a credit score. They may refund the deposit after a few months of timely payments.
How to Start Building Credit for the First Time
Building credit is possible, even though it may feel like a challenge at first. Here are some simple ways to build credit for the first time.
1. Use a Secured Credit Card
A secured credit card is one of the easiest ways to build credit if you don’t have a credit score. Secured credit cards require a deposit that will serve as collateral for the card company. The deposit will often equal the credit limit of the card. For example, a card with a $200 deposit will have a $200 credit limit.
You can use a secured credit card at the same retailers where you would use a traditional credit card, such as online or brick-and-mortar retailers. After several months of on-time payments, some providers will graduate you to a traditional, unsecured credit card.
There are two things to keep in mind when using a secured card. First, on-time payments make up the biggest portion of your credit score, so aim to always pay by the due date. A late payment can cause pitfalls in your credit score.
Second, keep your credit utilization below 30%. Your credit utilization is a percentage that represents how much credit you’re using compared to your overall credit limit. For example, if your secured card has a $500 limit, you should never have a balance greater than $150. Be careful, though, it’s very easy to stack up a high balance because secured cards have low limits.
2. Take Out a Credit-builder Loan
A credit-builder loan is a loan that you take out solely for the purpose of building your credit. Instead of receiving a lump-sum payment from your lender, you’ll make payments to the lender up to the agreed loan limit. After you’ve made all the payments, you’ll get back the money you paid, minus a small fee. This helps boost your credit score by creating a history of on-time payments.
How Long Does It Take to Build Credit?
The exact time it takes to build a credit score depends on the individual borrower. In general, it will take at least six months because the first account must be at least six months old to register on your FICO credit score.
During the process of building a credit score, be patient. Always strive to make your payments on time, keep your credit card utilization ratio below 30% and check your credit score at least once per quarter to evaluate any changes in your score.
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As a credit expert with extensive knowledge in the field, I can provide valuable insights into the concepts mentioned in the Forbes Advisor article. My expertise is backed by practical experience and a deep understanding of credit scores, financial products, and strategies for building credit.
Understanding Credit Scores: A credit score is a numerical representation of an individual's creditworthiness assigned by credit bureaus such as Experian, Equifax, and TransUnion. FICO and VantageScore are the two primary scoring models, with FICO being the most common. Scores range from 300 to 850, with higher scores indicating better creditworthiness. Lenders use these scores to assess the risk of lending money to an individual and determine the terms of credit accounts.
No Credit Score: Having no credit score implies that an individual has not opened any credit accounts, such as loans or credit cards. This situation is common among young adults who haven't established credit in their names. Unfortunately, lacking a credit history can pose challenges in qualifying for loans or credit cards. The article explores the catch-22 scenario and guides individuals on steps to build credit for the first time.
No Credit vs. Bad Credit: Distinction is made between having no credit and having bad credit. Bad credit typically refers to a score below a certain threshold (e.g., 580 or lower), indicating a history of late payments, defaults, or bankruptcy. The article emphasizes that building a good credit score from scratch might be easier than fixing a bad credit score.
Importance of Credit Scores: Credit scores play a crucial role beyond loan approvals, influencing interest rates, term lengths, and additional fees. They are also considered when applying for rental properties, and landlords often conduct credit checks. Utility and cell phone companies may require a deposit from individuals without a credit score.
Building Credit for the First Time: The article provides practical tips for individuals looking to build credit for the first time:
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Secured Credit Cards: Utilizing a secured credit card involves making a deposit that serves as collateral. On-time payments are crucial for building a positive credit history, and after several months, some providers may transition individuals to unsecured credit cards.
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Credit-Builder Loans: These loans are designed specifically for building credit. Individuals make payments to the lender, and upon completing the payments, they receive the deposited amount, minus a small fee. This approach helps establish a history of on-time payments.
Time Frame for Building Credit: The exact time required to build a credit score varies for each individual. Generally, it takes at least six months for the first account to register on a FICO credit score. Patience is emphasized during the process, with a focus on making timely payments, maintaining a low credit utilization ratio, and monitoring credit scores regularly.
This comprehensive overview highlights the key concepts discussed in the article and provides a practical guide for individuals seeking to understand and improve their credit scores.
