Establishing a Credit Score When You Don't Have One

Written by
Kara Johnson
Read Time: 5 minutes

The numbers are surprising: The Consumer Protection Financial Bureau in early May reported that about 45 million U.S. adults do not have enough of a credit history to have their own credit scores.

This is no small problem: Mortgage lenders rely on the three-digit credit scores of consumers to determine who qualifies for a mortgage loan. They also use the scores to determine the interest rates that they charge to consumers, levying higher rates for those borrowers with lower scores.

But if consumers have no credit score at all? Most mortgage lenders probably won't take the risk of doling out mortgage dollars to these consumers.

Sound finances are not enough

Daraius Dubash, a credit expert and founder of travel Web site Million Mile Secrets, says that even those consumers who make wise financial decisions might not have enough of a credit history to have a credit score.

And that can make life difficult even for those responsible consumers.

"The unfortunate thing in the United States is that you can have a lot of money and you can manage your finances responsibly but still have a terrible credit score," Dubash said. "If you paid for your car with cash, for example, that's a good financial decision. But you get no benefit to your credit score for doing that."

There is hope. It is possible for consumers to build a credit score. It will, though, take time.

The challenge

There is a reason why so many U.S. adults -- even those who pay their bills on time every month -- don't have credit scores. The three national credit bureaus that create credit reports on consumers -- TransUnion, Experian and Equifax -- don't track all the on-time payments that consumers make.

Do you pay your utility bill on time every month? How about your cell-phone or cable bill? Maybe you've never paid your doctor or dentist late.

That doesn't matter. The credit bureaus don't track those payments.

And until recently, none of the bureaus tracked on-time apartment rent payments, either. There is a change on this front, though: TransUnion and Experian are now tracking the on-time rent payments of consumers.

What the credit bureaus do track are the payments that consumers make to credit-card companies, mortgage lenders, student-loan providers and auto lenders. The bureaus also track how much of your available credit you are using and how much debt you have. Negative financial judgments such as recent bankruptcies, short sales or foreclosures will drag down consumers' credit scores.

No loans = no credit history

Consumers who don't use credit cards, don't have mortgage loans, aren't paying back student loans and aren't financing a car are the ones who might not have deep enough credit histories to generate credit scores.

The most important of the credit scores is the FICO score, the one that mortgage lenders rely on when determining who qualifies for mortgages. Consumers who don't have FICO scores will struggle to qualify for mortgage financing.

There is a push today for the credit bureaus to track such financial activity as on-time rent, utility bill and cell-phone payments. But it's not certain when or if the bureaus will actually include this information.

"As for when or if more types of bill payments will be used in the future? That remains to be seen," said Jeffrey Scott, a spokesman for FICO. "FICO is constantly studying new types of information that may be predictive of credit risk. If a new type of information shows promise, then FICO will examine it."

Building a score

Consumers who don't have credit scores can build a credit history by taking small steps, said Rod Griffin, director of public education with credit bureau Experian.

One of the easiest ways to build a credit history is to apply for a secured credit card from a credit union or bank. Such cards operate much like traditional credit cards. But there is a difference. The credit limits of such cards are connected to how much money consumers have in a savings account at the financial institution that passes out the card.

For example, if a consumer has $5,000 in a savings account, the credit limit on that consumer's secured credit card might be $4,000, a percentage of the amount of money currently in that card holder's savings account.

Secured cards aren't as flexible as are typical credit cards, but consumers who make on-time payments with them will begin to slowly build a credit history, Griffin said.

"Secured credit cards usually rank as one of the best ways for consumers to first start building a credit history," Griffin said.

Family can help

Another option? Consumers can sign up as a joint account holder on a traditional credit-card account with a relative who already has a strong credit history and credit score. When both account holders make their payments on time, those consumers without a credit history will slowly start building one.

Consumers can also ask a relative to co-sign with them on a loan, such as a car loan. In a co-signing arrangement, if the main account holder fails to make payments on time, the co-signer is responsible for making the missing payments. Because of this added financial protection, lenders are more willing to make a loan to consumers with limited or no credit histories; they know that even if the consumer without a credit score fails to make payments, they'll still receive their money from the co-signer.

Consumers with no credit scores can again build their credit histories by making the payments on a co-signed loan on time, Griffin said.

Building a credit history will get consumers a credit score. But consumers shouldn't expect instant results. Griffin said that consumers will have an actual credit history as soon as they make their first payments on a credit card or loan. That usually means that consumers will have a credit history 30 to 45 days after opening their first account.

Getting an actual three-digit credit score, though, will take additional time. To earn a FICO score, consumers must usually have a credit history that is at least six months old, Griffin said.

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