Establishing credit can be a long and involved process. It is also highly frustrating when you don’t yet have established credit because it’s impossible to get a credit card. That is because no one is willing to give you credit when you lack actually having used it in the first place. At the same time, however, it’s important to know that just because you have never had credit and don’t have a credit score, that doesn’t mean you have a zero credit score. In fact, you are essentially “credit invisible.” This problem is different from the issue of a person who has credit and damaged it. It is also easier than having to restore your credit.
The first step is to gradually build your credit so that lenders can see you via your eventual credit report. Afterward, the data in the credit report will eventually build you a credit score. If your score is good, it will open many doors for you toward gaining access to a variety of financial products.
What’s the Starting Point for a Credit Score?
Most lending decisions rely on credit score scales using FICO and VantageScore 3.0. Scores start from 300 all the way up to 850. However, you never start at zero when you’re new to credit and instead begin at 300. This is normal if you have never had credit and have never made any terrible financial mistakes. It occurs because when you have no credit history, the credit bureaus lack information on you and therefore, don’t know if you will be able to pay back money you borrow. That is precisely what a credit score is: it’s an estimate of how likely you will be to pay back your debt.
After you have started actually using credit and establish a credit score, the score you are given depends on a few different factors: how long you have been using credit, how well you handle it and the combination of credit types you are using. At this early stage, you won’t have a credit score that sits at the high end, but it won’t necessarily be the lowest, either.
How to Get Credit
One of the best ways to announce yourself to the credit bureaus and develop your credit history is to actually apply for credit. Some good starting points include financial products that protect lenders from the risk of not paying back. Good examples of those items include secured credit cards and credit builder loans.
Prior to applying, you should request a free credit report from each of the three credit reporting agencies of TransUnion, Experian and Equifax. You can obtain one free report from each of the agencies annually. Keep in mind that if you have a file but have never had credit, it should be considered a warning sign. It can mean that someone is using your identity to obtain credit or that there has been a mistake made that confuses someone else’s information with yours. Look out for mistakes like those and clear them up with the agencies.
Rules to Follow After Being Approved for Credit:
There are generally three basic rules to follow:
- Pay your bills on time. Your payment history has the biggest influence on your credit score
- Keep your spending on credit limited to 30 percent or less. This is known as credit utilization
- Try to get a mix of account types, such as credit cards (revolving debt) and auto loans (installment loans with regular payments)
When you utilize these tips, you’ll build your credit report in no time. You should also strive to get a credit score that provides you with lower interest rates and access to better credit, such as an unsecured card or a rewards card.
Don’t Worry About Numbers
There is something called the National Risk Score that includes a number anywhere between zero and 1,300. This is used to predict whether you would ever file for bankruptcy in the future. In this instance, you want as low a number as possible. This means your risk is lower. At the same time, you shouldn’t get too hung up on numbers when it comes to your credit score. It is recalculated fairly regularly. Instead, you should focus on your “general risk” category. This is the range of credit scores of 300 to 629 or bad credit, 630 to 689 or fair credit, 690 to 719 or good credit and 720 and higher or excellent credit.
Always make sure to pay your bills on time and keep your balances low. That will definitely help you to maintain good credit scores.