Insufficient credit history does not necessarily mean late payments or any negatives listed on a consumer credit report. An insufficient credit history means no proven track record with creditors that have lent money, other assets, or extended any form of credit, revolving, or installment. Whether applying for rental property, a personal loan, a student loan, a line of credit, a credit card, or a store credit card, when another party will depend on a fulfillment on a promise to pay, a sufficient credit history should be the requirement.
An Insufficient Credit History Complicates Life
Having no credit or bad credit can complicate your financial life. Generally speaking, having no credit is better than having bad credit. But either unestablished credit or a negative credit report can make it difficult to qualify for installment loans or credit cards without a cosigner. However, it is possible to get a loan with no credit or bad credit, but lenders will likely charge you a higher interest rate than if you had established credit history.
No Credit Score Does Not Mean Zero Credit
If you have no credit history, the result is that you have no credit score. However, no credit score is not the same thing as a credit score of zero. The most frustrating thing about credit might be the chicken-and-egg problem of establishing a credit profile. No substantial creditor wants to grant credit without a track record of using credit successfully and responsibly in the past. There is no such thing as a credit score of zero. Most in the U.S. start at 300, and sometimes lower, depending on the credit scoring system. This means that you cannot have a credit score of zero. Some credit scores, such as Bankcard and Auto scores, range from 250-900.
Credit History Explained
A credit score is compiled based on information in your credit history. Three major credit reporting agencies keep a file on you. The three major credit bureaus are the following:
Each credit reporting agency takes the information reported by a creditor and then creates a credit score that potential creditors can ask them for once you’ve given your permission to share.
What Comprises a Credit History or a Credit Profile
Credit history is made up of a summary of the following information:
- Payments on credit cards
- Payments on loans
- Types of credit
- Late or missed payments
When the credit reporting agency calculates your score, your payment history is taken into consideration. Another measure that goes into calculating a credit score is credit mix. A good credit mix has a combination of unsecured and secured debt (usually in the form of an installment loan). Also, the age of your credit history (how far back your payments go) and finally, the amount of debt you have versus the amount of credit available to you are all compiled to give you a credit score in the range of 300 to 850.
Payday Loan vs. Installment Loan
Part of sufficient credit history has a healthy mix of installment loans and secured and unsecured credit. There is a type of loan that an individual or, in some instance’s business can get called a payday loan. A payday loan functions differently than a traditional installment loan in many ways. When evaluating a payday loan vs. installment loan, the important aspects are as follows:
- Payday loans usually have APR’s higher than 400%
- Generally, no credit check
- Means to repay is not a requirement
- A maximum cap of $1,000
- Extremely short term loan
Suppose you are wondering if a payday loan is secured or unsecured debt; the answer is that payday loans are only secured against a future paycheck deposit into a checking account. Again, payday loans are unsecured debt obligations that are not reported on an individual’s credit.
Sufficient Credit History
You have to have seven years of credit history to have “good credit” at all. Because of the seven-year rule, you can have a spotless payment history but still get turned down for certain credit cards if your history doesn’t go back at least seven years.
How Do I Fix an Insufficient Credit History?
To build a credit history, certain steps need to be followed. Following are eight simple, easy, and quick steps that anyone can follow to fix an insufficient credit history fast:
- Pay all bills on time
- Make frequent payments on credit accounts.
- Ask for higher credit limits whenever possible
- Dispute credit reporting errors with the credit bureaus (use the following sample credit dispute letters to dispute potential credit reporting errors)
- Become an authorized user on a credit card with a high, aged credit line
- Use a secured credit card as a means to grow a credit profile
- Keep all credit cards open
- Utilize a store credit card as a form of revolving credit
- Take out a short term, cash or CD secured Credit Union or Bank loan (if possible)