“No debt” doesn’t automatically mean you have great credit.
I don’t have any debt. I pay my bills on time every month. Why is my credit score so low? Are these questions you’ve been asking yourself? “No debt” doesn’t automatically mean you have great credit. Credit cards, loans (home loan, auto loan, personal loan) and any negative records such as medical collections, other collections, repossessions, 30+ day late pays, charge-offs are pooled together and then calculated to make your credit score. If you have a thin credit profile, meaning you only have 1 tradeline (tradelines are credit card or home, auto or personal loan) or brand new tradelines your credit scores will remain low. If you have never used traditional credit accounts/tradelines (meaning you don’t have a credit card or home, auto or personal loan) your credit scores will be nonexistent.
Look at credit/tradelines like homework. If you don’t turn in your homework to your teacher, they have nothing to grade you from or report on. This is the same with credit/tradelines, if you don’t have and maintain tradelines there is nothing for the bureaus to report. A credit score is a grade on how likely you are to default on a loan, are you a risk to loan money to, do you exhibit responsible financial behavior, and do you keep and maintain your credit accounts in good standing?
While paying your rent, insurance, phone and utilities on time is vital and a responsible way to handle your finances, these are not posted on your credit report, therefore these items don’t calculate a credit score. The exception to this is if one of these accounts go into collection status, they can appear on your report and harm your credit score.
Your credit history will only begin when a creditor such as a credit card issuer or lender reports a record of you opening an account to one or more of the three major credit bureaus. (Experian, TransUnion and Equifax).
4 Reasons for Low or Non-Existent Credit Scores:
- You just recently opened your first credit card or loan.It will take a few months for it to appear on your credit report. FICO scores need at least one account that’s been active for the past 6 months to calculate a score.
- It’s been 24 months or more since you have used credit/tradelines. Once you open a credit account/trade-line it’s essential to use it as this shows your credit worthiness. This enables lenders and scoring algorithms to calculate how you handle your credit. If you have trade-lines but don’t use them for 24 months or more, your credit file doesn’t have the data it needs to calculate a credit score.
- You are new to the United States.Immigrants typically don’t have a credit score because they haven’t applied or used credit lines in the United States. Even if you have credit established and a score from another country, this does not transfer or count towards your U.S. credit score. It is important you consider opening a line of credit to begin establishing credit history and building your score.
- You only have 1 credit card or 1 loan.This is considered a thin credit profile as this will give you a credit score, but it will not be enough to give you high credit scores or be considered a thick and healthy credit profile. You will want to open a few more trade-lines to establish a good, healthy mix of credit (ideally 2 credit cards and 2 installment loans-home, auto or personal loan). When you handle 3 to 4 tradelines responsibly (paying on time, keeping credit card balances 30% or below balance vs the limit, keeping the trade-line open for several years, this is evidence you are credit worthy and are low risk to default on the line of credit you are applying for.
How to Establish Your Credit Score:
Obtaining your first credit card can be difficult, many times you need to have credit to be approved for credit. There are a few options for beginners or second timers to consider below:
- Apply for a credit card at your local bank or credit union, especially if you already have a checking or savings account there.
- Apply for a CD credit builder loan at your local bank or credit union
- Apply for a student credit card, if you’re an enrolled student
- Apply for a retail store credit card
- Apply for a secured credit card, which requires a deposit to secure your credit limit
- Be added as an authorized user on credit card with a friend or relative
It’s important that you make sure your new credit/trade-line is reported to all 3 bureaus. If not, at least 2 bureaus but 3 is ideal.
What to remember: No credit/tradelines or a thin credit profile typically results in a low or non-existent credit score. To establish a high credit score and enjoy low interest rates you need to have a thick mature credit profile with 3 to 4 trade lines which is ideally accomplished through 2 credit cards and 2 installment loans (auto, home, personal loan) that are paid every month on time and have had time to age. Remember keep your tradelines open for a very long time. The older the tradeline the better your credit score will be.