Credit impacts many areas of modern life, far beyond the interest rate on your MasterCard.
The consequences of your relationship with credit are unavoidable. Being “credit invisible” — having never borrowed money or recently developed any credit history — has implications when renting a car, applying for a mortgage, or interviewing for a job.
There are many avenues for people without a credit history to establish themselves, but some methods are better than others.
What Is Credit Invisibility?
Most interactions with credit are reported to the three main credit bureaus: Experian, Equifax, and TransUnion. These are the companies that calculate people’s credit scores. But if you have no history of borrowing and paying back money — 10 percent of Americans don’t — those bureaus have very little to base their scores on.
Similarly, if you’ve had limited interactions with credit — whether you’ve either gotten credit or had no debt or open credit lines in six months — the credit bureaus won’t have enough information on you to calculate a credit score. These people, who make up between 20 and 30 percent of Americans, are known as “thin filers.”
Good credit isn’t something you can establish instantly. If you want the ability to borrow for a big-ticket item such as a home or car, you’ll need to build your credit before that option becomes available to you. Otherwise, you might not get the loan you need — or you’ll only get it with a costly interest rate tacked on.
Traditional Obstacles to Visibility
Your FICO score, which is a measurement of the risk to businesses offering you credit, is the master of your fate. This score is calculated using everything from your type of credit and frequency of payments to a laundry list of other factors, including how frequently you open up new credit lines, how many accounts you have, and how often you carry a balance.
For people without a credit score, the biggest obstacle is time. The length of time you’ve had credit is a big component of your score, but it’s also bad for your score if you open multiple accounts at once. Ideally, you want three to five accounts spaced out from each other, and there’s simply no good way to accomplish that quickly.
Pushing Toward Visibility
There’s no way to short-circuit the process, but smartly building credit can minimize the time it takes to get a great score.
- Apply only if you qualify. Getting denied for a credit application isn’t just disappointing — it dings your credit score. You’re more likely to be denied if you apply for multiple credit accounts simultaneously.
- Ask your landlord to report your rent to the credit bureaus. A property management company may be more willing to do this than a traditional landlord, but if you can share your record of on-time payments with reporting agencies, your credit score will inch up that much quicker.
- Use starter credit cards. If you’re younger and in college, you can find some starter credit card options that have small lines of credit. Also, many banks offer secure credit cards tied to savings accounts, which allow you to borrow against money you’ve already saved.
- Pay off your balance. The interest rates on these starter accounts can be pretty high, so you’ve got to stay vigilant to avoid some spiky fees. Use your card to show that it’s active, but don’t necessarily carry a balance. After 12 to 18 months of consistent payments, you could have a credit score of 700 or more.
- Keep track of your score. AnnualCreditReport.com, a government-sponsored site, allows you to view a free report once a year. It’s a “soft check,” which shows all your open accounts without hurting your credit, though you have to spend extra to see your actual FICO score. For this, programs like Mint.com help you manage your finances and provide a free credit score at the same time.
Borrowing While You Build
Life can throw you a curve, requiring you to borrow for a major purchase while you’re still building your credit. The cost of borrowing will always be higher during this transitional period, but there are ways to minimize the pain.
For instance, if you pay a cell phone bill every month, this can be a great way to demonstrate to credit reviewers that you have a long-term record of making regular payments.
Also, some alternative lenders will provide credit invisibles and thin filers a chance at credit. They use nontraditional credit data — such as rental and utility payment history — to go beyond a simple FICO score.
All of this is contingent, of course, upon following the fundamental rule for credit success: Pay your entire bill on time, every time, to watch your credit score rise.
Michael Thorne is the chief technology officer at Bristlecone Holdings, a network of financial technologies that help merchants empower consumers to make meaningful purchases. Follow Michael on Twitter.