Trying to figure out how to build credit is a process that frustrates many people. Where is a newcomer supposed to start?
The good news is there are several strategies you can use to build credit with no credit history. This guide will help you discover how to find out whether you have a FICO® Score, along with some steps you may want to consider for those who need to build credit from scratch.
Do I have a credit score?
A credit score is a tool that lenders can use to predict risk, which can help consumers access financing in a faster and more fair manner. The FICO® Score, first introduced over three decades ago to replace judgmental underwriting, calculates how likely consumers are to repay their credit obligations as promised.
“Ninety percent of the credit-eligible population in the U.S. can be scored by the FICO® Score,” says Joanne Gaskin, vice president of Scores and Analytics at FICO.
That’s good news since 90 percent of the top lenders in the United States use the FICO® Score for credit-granting decisions and other purposes.
Building a credit score from scratch is a bit different than trying to raise your existing credit score. To be eligible for a FICO® Score, your credit report must meet time-tested minimum credit scoring criteria, including a credit file that:
- Doesn’t indicate that you are deceased
- Has at least one credit account that’s been open for six months or longer
- Has at least one credit account that’s been reported to a credit bureau in the last six months
For example, let’s assume you have a retail store card that you opened seven months ago. As long as the card issuer reports your account to a major credit bureau, you should be eligible for a FICO® Score.
How to find your FICO® Score
Checking your FICO® Score regularly can help you keep tabs on your credit health. And even if you think you don’t have a credit score, it’s not a bad idea to check and confirm.
It’s worth noting that some of the credit score offers you find online feature other types of credit score models or scores produced for purely educational purposes. Yet, if you know where to look, there are several ways to access your FICO® Score and track it to see whether it’s trending up or down over time.
- FICO® Score Open Access: Consumers may be able to access their FICO® Score directly from their lender via the FICO® Score Open Access program. Lenders pull FICO® Scores for account management purposes, and FICO® Score Open Access allows lenders that participate to share those scores for free with their customers.
- Score A Better Future events: FICO sponsors a credit empowerment program known as Score A Better Future. The mission of this program is to improve financial literacy and as part of the program, FICO partners with nonprofit credit counselors who provide free credit reports and FICO® Scores, along with credit education and personalized credit counseling.
- Authorized FICO® Score Distributors: Consumers can access their FICO® Score through authorized distributors. It is important to note that if the score doesn’t say “FICO,” it probably isn’t a FICO® Score.
Building credit with no credit history
When you set out to build credit for the first time, it’s important to apply for the right types of accounts. Some lenders require a good FICO® Score (and sometimes an excellent score) to qualify for financing. That means you’re unlikely to be approved for those accounts as a credit newcomer. Yet, there are several credit-building strategies for people with no credit history.
Consider becoming an authorized user
One potential way to establish credit using traditional credit bureau data is the authorized user strategy. With this credit-building approach, you would ask someone you know (typically a family member or close friend) to add you to their credit card account as an authorized user.
Once added, the credit history that your loved one has already established on the account might be able to pass on to you. But there are a few details to be aware of if you’re trying to build credit as an authorized user:
- An authorized user account could help you meet the eligibility requirements for a FICO® Score.
- The account must show up on your credit report with at least one credit bureau before it has the potential to impact your FICO® Score.
- Your FICO® Score could improve or decline when an authorized user account shows up on your credit report, depending on whether the account history and other details are positive or negative. (Tip: On-time payments and low credit utilization are important.)
Check out secured credit cards
Opening a secured credit card is another potential way to build credit (provided the card issuer reports the account to the credit bureaus). With this approach, you start by making a deposit with the issuing bank or credit union. The deposit is often equal to your new credit card’s credit limit, and it protects the lender in the event you fail to repay as agreed.
“Secured cards are often reported into traditional credit bureau files,” says Gaskin. “So, it’s a great way to build credit.”
It’s important to remember that you should manage your secured card the same way you would manage an unsecured account. Paying on time and keeping your credit utilization low is still critical if you want to earn a good FICO® Score.
Credit builder loans
A credit builder loan is another possible way to get positive payment information onto your traditional credit bureau files. These loans can work for people who want to build credit without a credit card, as well as those who are looking to add an installment account to their credit report. And because the account is different from a traditional personal loan, it may be easier to qualify for if you have little or no established credit history.
When you open a credit builder loan, the lender does not issue the loan proceeds to you right away. Rather, those funds go into a separate savings account. You then proceed to make payments to the lender (often for 12 to 24 months, though terms can vary). Once you make your final payment, the lender collects any remaining fees you owe and releases the rest of your loan proceeds to you.
Explore New Pathways to Credit
“While 90 percent of the credit-eligible population gets a traditional FICO Score, there’s still millions of consumers that do not,” notes Gaskin.
So, the FICO team has examined what it can do as an independent analytic provider to address this challenge. FICO developed ways to give lenders access to the predictive power of alternative data—data outside of traditional credit files. That alternative data can take the shape of phone bill payments, utility bills, rent and more.
“This information is highly predictive,” Gaskin says. “It just doesn’t happen to reside at the primary three credit bureaus.”
So, FICO designed FICO® Score XD (developed in partnership with LexisNexis® Risk Solutions and Equifax®) and UltraFICO™ Score with the capability to consider this nontraditional information and help many consumers who were otherwise “credit invisible.”
With the use of alternative data, FICO is able to score another 27 million consumers without a traditional FICO® Score. Gaskin says this is exciting news for lenders, as well.
“We’re allowing lenders access to expand the population of consumers they can safely provide credit to,” Gaskin says.
If you are interested in learning whether you can take advantage of new models that use alternative data sources outside the credit file, talk to your lender to see if they are using these newer score models.