Kena Paul A credit history is a record of a person’s borrowing and repayment activity, chronicling the individual’s financial behavior over time. This history includes information about how much credit you’ve used, your payment habits, the length of your credit history, the types of credit you’ve handled, and the frequency of your credit applications. It’s compiled by credit bureaus and summarized in your credit report, which is then used to calculate your credit score.
How Credit History Impacts Your Credit Score
Credit history impacts your credit score in many different ways. Here’s how:
Your Payment History
This is the most significant component of your credit score, accounting for approximately 35% of the total score according to FICO. It includes records of whether you’ve paid your credit accounts on time, the frequency of late payments, and any defaults or bankruptcies. Regular, on-time payments positively affect your score, while late payments, defaults, and bankruptcy can cause it to drop significantly.
How Much Credit You Use
Making up roughly 30% of your credit score, this ratio measures the amount of credit you’re using compared to your credit limit across all accounts. Lower utilization rates are seen as indicators of good credit management and can boost your score.
Length of Your Credit History
The length of time your credit accounts have been active constitutes about 15% of your credit score. Older credit accounts tend to improve your score as they provide a longer history of your credit behavior.
The Types of Credit You’ve Used
This refers to the mix of credit accounts you manage, such as credit cards, installment loans, mortgage loans, etc., and impacts about 10% of your score. A diverse mix of credit types can positively influence your score, showing your ability to manage different kinds of borrowing responsibly.
How Frequently You Applied for New Credit
The frequency and number of recently opened accounts and hard inquiries from lenders make up the remaining 10% of your score. Opening many new accounts in a short period can be seen as risky behavior, potentially lowering your score.
What’s Your Credit Score if You Don’t Have a Credit History
If you have no credit history, you effectively have no credit score because there’s no data on which to base an evaluation of your credit behavior. This situation is often referred to as being “credit invisible.” Here’s what this means for you and how it can impact your financial actions:
- Difficulty Obtaining Credit: Without a credit score, lenders and credit card issuers have no way to gauge your risk as a borrower. This can make it difficult to get approved for credit cards, loans, and even some types of insurance. Lenders might either deny your application or offer you less favorable terms, such as higher interest rates or lower credit limits.
- Higher Security Deposits: Many utility companies and landlords check credit scores when deciding whether to require a security deposit and how much it should be. Without a credit history, you may be asked to pay higher deposits.
- Limited Negotiating Power: A good credit score can give you leverage to negotiate better terms on loans and credit cards. Without a credit history, you lack this advantage, potentially costing you more over time.
How to Build a Credit History and Get Good Credit Ratings
Building a credit rating from scratch can seem daunting, but it’s entirely feasible with the right approach. Here are five practical tips to help you establish a good credit history when you have none:
- Apply for a Secured Credit Card
One of the easiest ways to start building your credit is by getting a secured credit card. This type of card is backed by a cash deposit you make upfront; the deposit amount typically becomes your credit limit. Use the card to make small purchases and pay off the balance in full and on time every month. This responsible usage will be reported to the credit bureaus, helping to build your credit score.
- Consider a Credit Builder Loan
Credit builder loans are designed specifically for people looking to build or rebuild their credit. Unlike traditional loans, you won’t receive the borrowed money upfront. Instead, the lender puts the loan amount in a secure account. You make monthly payments towards the loan amount, and the lender reports your payment history to the credit bureaus. Once the loan is fully paid, you get access to the funds.
- Get a Co-Signer
If you have a family member or friend with good credit who trusts you, you can ask them to co-sign a loan or credit card application. This allows you to benefit from their good credit. Ensure you make payments on time to avoid damaging both your credit score and the co-signer’s.
- Become an Authorized User
Another method is to become an authorized user on someone else’s credit card. If the primary cardholder has a good credit history and pays their bills on time, your credit can benefit. This arrangement lets you piggyback off their creditworthiness without the legal responsibility to pay the credit card charges.
- Pay Bills on Time
While utility and phone bills are not typically reported to the credit bureaus, if you fall behind on payments, your account could be sent to a collection agency, and that can negatively impact your credit score. Conversely, some financial services report regular payments, so always paying these bills on time can potentially help build your credit.
A credit history is a record of a person’s borrowing and repayment activity, chronicling the individual’s financial behavior over time. This history includes information about how much credit you’ve used, your payment habits, the length of your credit history, the types of credit you’ve handled, and the frequency of your credit applications. It’s compiled by credit bureaus and summarized in your credit report, which is then used to calculate your credit score.
5 Commonly Asked Questions about Building a Credit Rating with No Credit History
When you’re starting from scratch with no credit history, you may have several questions about how to begin building a solid credit rating. Here are five commonly asked questions along with straightforward answers to help you navigate this process:
1. How long does it take to build a credit history?
Building a credit history doesn’t happen overnight. Typically, it takes about three to six months of financial activity reported to the credit bureaus to establish a credit score. Keep in mind, however, that developing a good credit score might take a few years of continuous, responsible credit usage.
2. Can paying rent and utilities help me build a credit score?
Normally, rent and utility payments are not reported to credit bureaus and thus don’t impact your credit score. However, there are third-party services that you can use to report these payments. These services might charge a fee, but they can be useful in building credit from scratch by documenting consistent, timely payments.
3. Is it better to get a secured credit card or a regular one to start building credit?
If you have no credit history, securing a regular credit card might be challenging. A secured credit card is generally recommended for beginners because it requires a cash deposit that becomes your credit limit, minimizing the risk for the issuer. By using a secured card responsibly—making purchases and paying them off each month—you can start building your credit score.
4. What should I do if I’m denied a credit card even though I’m trying to build my credit?
If you’re denied a credit card, review the reasons provided by the card issuer. Common reasons might include insufficient income or lack of credit history. You can apply for a secured credit card or look into becoming an authorized user on someone else’s credit card. Additionally, consider applying for a credit builder loan from a credit union or online lender.
5. How many credit accounts should I open when first building my credit?
When starting out, it’s wise to begin with just one or two accounts. Managing these accounts well can help you build a strong credit history. Opening too many accounts too quickly can lead to hard inquiries that may hurt your score, and might also make it challenging to manage the payments effectively.
Building a credit rating from zero is a journey of financial discipline and patience. Starting small, making payments on time, and gradually adding to your credit portfolio will help you establish and maintain a strong credit score.
