You may pay your bills on time. You stick to a budget. You may even have responsibly tucked away savings for a rainy day. Yet even if you are the very picture of financial responsibility, if you have never applied for a loan or a credit card account, there is a good chance that you may not have a credit report or a credit score.
You Have to Qualify For a Credit Score
Credit scores are based on the information found in your credit reports. If your credit reports are a blank page, you will not be eligible to earn a credit score. Of course, there is more than one type of credit score (in fact there are hundreds), but if your goal is to qualify for a mortgage loan, the credit scores you are going to be the most concerned with are created by FICO and VantageScore Solutions.
Every credit scoring model has its own conditions that you must meet before a credit score will be calculated for your report. To meet the minimum credit scoring criteria you must have ...
- At least one undisputed account opened for at least six months, and
- At least one undisputed account that has been updated with the credit bureaus within the past six months, and
- No indication of "deceased" on the credit report
The above criteria is specific to FICO’s scores. VantageScore’s criteria is more lenient and you can qualify for one of their scores with less information. According to VantageScore, its scoring models can calculate a score on 30 million more consumers. One way or the other, you need a score to function efficiently in the credit environment.
Tips to Build Credit With No Credit
When it comes to building credit scores for the first time, there is certainly more than one way to go about the process. Of course it is generally not as simple as just going online or driving down to the bank to open any loan or credit card you like. First, you have to get your application approved, and getting a lender to agree to be your credit guinea pig is not always an easy task. Conservative banks typically don’t like to be trailblazers.
Thankfully there are a few financial products that are typically less strict when it comes to approval criteria. If you are building credit on your own for the first time the following types of accounts may be your best bets:
Secured Credit Cards
Probably the most well-known way to establish credit for the first time without the help of a co-signer is the secured credit card. The reason secured card cards are generally easy to qualify for is due to the way these types of accounts are structured.
When you open a secured card you will probably be required to make a deposit with the issuing bank equal to the credit limit on your account. Deposit $300 and your card will have a credit limit of $300. Deposit $500 and, well, you get the picture.
Due to the fact that you are securing the account with your own funds, there is considerably less risk involved for the lender. As a result, many lenders will approve your application for a secured card even if you are a credit newbie.
Credit Builder Loans
Secured credit cards are not the only way for you to build credit for the first time. Another solid option is the credit builder loan. If you are interested in opening a credit builder loan, you will most likely need to take a trip down to your local credit union (though there may be some options online as well). Once approved you will generally be issued a loan for a small amount ($500 to $1,000); however, the funds are not actually handed over to you immediately like with a normal loan. Instead, your funds are held in a savings account. You will make payments to the bank (generally for a short six to 12 months), and once you make your final payment, the funds plus any interest earned will be released to you. In the meantime you will have six to 12 months of payment history on your credit reports, provided that you never made your payment late.