If you find yourself in a bind and need some cash to pay a bill, buy some groceries, a new car or have an emergency, sometimes it isn’t easy to get the money you need.
And if you have no credit or even bad credit, what’s a person to do? Thankfully, you have some options in which you can get what you need, fast.
What Does It Mean to Have No Credit?
Having no credit means that you’ve never applied for a loan, credit card, or any other financing option.
You have no credit history with any of the three major credit reporting agencies — Equifax, TransUnion, and Experian.
According to the Consumer Financial Protection Bureau, there are about 26 million Americans who are “credit invisible.”
In addition, another 19 million people have credit reports but don’t qualify for a credit score because of those requirements above. This means lenders consider you – and about 45 million other Americans – to have “no credit.”
Credit invisibility is a big financial setback. Credit cards and credit have many advantages.
Without a credit history, you won’t meet the minimum requirements to have a FICO or VantageScore credit score.
What Does It Mean to Have Bad Credit?
Bad credit means you’ve made some poor moves such as making late payments, having accounts in collections, filing for bankruptcy, having your vehicle repossessed if you didn’t make auto loan payments or facing foreclosure for not making your home loan payments.
It also means your credit score will be on the low end of the spectrum, which ranges from a low of 300 to a high of 850.
Minimum Credit Score Requirements
Credit score ranges differ between the primary scoring models.
FICO Credit Scoring Model
FICO, which gets its name from the Fair Isaac Corporation, is probably the best-known credit scoring model.
- Your credit report must have at least one account that’s at least six months old.
- Borrowers also must have one account that’s been reported to the credit bureaus in the past six months.
The FICO credit scoring model uses the following factors to determine an individual’s score:
- Payment history: This includes late payments, on-time payments, accounts in collections, foreclosures and bankruptcies. It makes up 30% of the score.
- Length of credit history: This focuses on the age of each credit card or loan account. It accounts for 15%.
- Credit utilization: This refers to how much of their available credit a person is using. The recommended credit utilization is below 30%. Credit utilization accounts for 30% of the overall score.
- Mix of credit: This refers to the different types of credit or accounts a person has, such as open lines of credit, installment loans, and so forth. It makes up 10% of the score.
- Most recent credit applications or hard inquiries: 10% of the score is based on how many recent loan or credit card applications a person has had. The more hard inquiries, the greater the impact on the score.
- Derogatory marks: Although not percentage-based, things like bankruptcies, accounts in collections and foreclosures all hurt the overall score.
It’s better to have a FICO score higher than 670 if you’re applying for any type of financing. A score of 670 and up is considered a good credit score. If your score is lower, here’s where you fall:
- Fair credit score: 580-669
- Bad credit score: 300-579
You can find your FICO score at myFICO.com or one of the major credit bureau’s official websites. Another option is to get it from your credit card issuer, bank or credit union.
VantageScore Credit Scoring Model
VantageScore is FICO’s main competitor. Lenders and property owners use it often. It maintains a list of free credit score providers, along with information on which credit bureau’s score is offered and how often it updates.
VantageScore requires your credit report to have at least one account with no minimum age requirement.
VantageScore ranges are a bit different than FICO. A score higher than 660 is considered good. There are three other ranges:
- Fair credit score: 601-660
- Poor credit score: 500-600
- Very poor credit score: 300-499
This scoring model uses five categories to determine a person’s credit score. However, it doesn’t give exact percentages for each category. The most important factors are:
- Credit usage: Most influential
- Credit mix: Highly influential
- Payment history: Moderately influential
- Credit history length: Less influential
- Recent activity: Less influential
It can take less time to establish a VantageScore than a FICO score; VantageScore can produce a score within a month or two of a consumer opening a credit account. FICO scores require six months of credit history.
If you’re looking to track your score for credit-building purposes, a VantageScore will work as well as a FICO.
You can get a free VantageScore report from AnnualCreditReport.com. Most major credit card issuers (CreditWise by Capital One, Credit Karma, Discover’s Credit Scorecard, etc.) also provide a credit report. Or you can request it from the credit bureaus.
Why Does a Credit Score Matter?
Your credit score helps lenders judge your risk of default, predict the chance that you’ll make overdue payments, and is usually used to determine interest rates.
If you have bad credit, lenders will assume that lending you money is riskier, and therefore will either turn you down outright or charge you higher interest rates.
Until you haven’t yet established credit, lenders might decline your loan applications because you’re an unknown risk.
Why is Bad Credit Worse than No Credit?
More lenders are willing to do business with someone whose credit is unknown versus someone with a poor credit history, particularly students who are just starting to learn how to manage their own finances. However, it can smooth the path considerably if you’ve taken some early steps, like being added onto a parent’s credit card account as an authorized user or signing up for a service that gives you credit for making regular monthly payments for streaming services or other routine bills you might pay.
Challenges of Having No Credit History
It’s best to try to establish at least a minimal credit history so that you’re prepared for major life events. For example, your creditworthiness will matter when you need to:
- Get a mortgage, credit card, auto loan, personal loan, or finance a high-ticket item.
- Borrow money to start a business
- Rent an apartment (most property owners and leasing agents will run a credit check)
- Avoid security deposits on utility accounts and other household services
- Finance a cell phone
- Qualify for better interest rates and loan terms
Are you starting to build credit from scratch? Here’s what you need to do:
10 Ways to Build Credit
If you haven’t used credit in the past, there are a few steps to take now to build a credit history before you need a major loan.
Apply for a Secured Credit Card
A secured credit card requires you to put down a deposit as collateral, then your line of credit is equal to the amount you’ve deposited. For example, if you deposit $250, that will also be your credit limit. However, that deposit is not used toward your bill. You will still need to make on-time payments.
Here are some of the top secured cards to build credit:
Note: Capital One has some solid offerings for unsecured and secured credit cards for people with no credit or bad credit, but because Capital One runs hard inquiries with all three credit bureaus (most other credit card issuers only run one hard inquiry with one of the three credit bureaus), it will be harder to qualify for a Capital One account if you have no credit, and if you apply and are declined, that in turn could make it more difficult to qualify for a credit card from a different lender.
Apply for an Unsecured Credit Card
An unsecured card is a traditional credit card account with no collateral required. There are usually a few options for students with no credit, particularly from Discover. The original credit limit will be low and will increase after a few months of use and on-time payments. If you have bad credit, it can be difficult to qualify for these products, so you may need a co-signer.
Here are some of the top unsecured credit cards to help you build credit:
- Petal 2 Cash Back No Fees Visa
- Credit One Bank Platinum Visa
- Premier Bankcard MasterCard
- First Digital NextGen MasterCard
Get a Loan with a Co-Signer
A co-signer can help you get approved for a personal loan and qualify for better interest rates with their help. But co-signing is risky, so it’s key for the co-signer to understand what’s at stake. If you default on the loan, your co-signer will be on the hook for the payments and there could be hard feelings if you stick them with the bill.
Add to Your Credit Mix
Just as you don’t want to pour your entire savings into one investment, it’s better to have a variety of credit options on your credit report.
Your credit mix is the variety of credit options and loans in your credit file. You’ll have a higher credit score if your credit mix is diversified. This means that even though it might mean you have a higher amount of debt, it’s better for your credit score if you have $200,000 in debt from home loans, student loans, medical bills and credit cards than $50,000 in credit card debt.
Apply for a Charge Card with a Favorite Store
Keep in mind this is not a credit card. A charge card can only be used for purchases at one specific store (Lowe’s, for example.) Buy items and pay the bill off in full each month — or make the payments. The benefit of many of these charge cards is a set period of time when you pay no interest on your purchase. This can be a good way to build credit without taking on a lot of debt. You can use it to purchase an item, then take advantage of the introductory period to make multiple smaller payments, building payment history without paying interest.
You’ll need a card that does not include a MasterCard, Visa, American Express or Discover Card logo on it. For example, Nordstrom offers two cards — one that can be used only in Nordstrom and Nordstrom Rack stores, and a Nordstrom Visa that can be used everywhere. While someone with no credit will likely be declined for the Nordstrom Visa, the acceptance criteria for the store-only card will be more flexible, with a lower credit limit. After you establish a pattern of responsible use, the card can be upgraded to a mainstream card, or you can apply for a completely different credit card.
Become an Authorized User on a Family Member’s Account
An authorized user is someone who has been added to an account without an additional credit check. They get a card with their name on it and share charging privileges, but are not responsible for paying the bills.
The primary cardholder (and secondary, if applicable) is responsible for all charges made on the account, including by the authorized user.
A credit-builder loan is one option for building credit. Whether you have poor credit or no credit history, you might be able to help build or rebuild it with a secured credit card. With a secured credit card, you get access to a line of credit upfront that you can use to make purchases — like when you use an unsecured credit card. Self offers a good plan that starts as low as $25 per month.
Open a New Bank Account with Chime
Chime offers debit cards and various credit-builder products that can help you build credit, while also encouraging savings. Chime also offers a large network of ATMs, so you have fast access to your money when needed. Chime is a member of banking providers on the web. As a financial technology company (not a bank), it doesn’t have much of the overhead that’s usually associated with traditional banking.
Take Out a Student Loan
Student loans are almost inevitable these days.
Americans are currently carrying about $1.75 trillion in student loan debt, and the average loan total hovers at more than $37,000, or a monthly payment of $373.
Many students heading off to college or trade school haven’t had much of a chance to establish credit, so student loans are usually geared toward borrowers with minimal to no credit and they offer a valuable opportunity to build a credit score by diversifying your credit mix and increasing the average age of your credit.
Federal student loans offer more relaxed credit requirements and repayment options. But don’t commit to a loan just to help your credit score. Make sure to exhaust all of your other aid, scholarship and work-study options first.
The first step is to complete the Free Application for Federal Student Aid, or FAFSA. The government and some schools use the FAFSA to determine which aid you’re eligible for including grants, work-study, and loans. States and schools also use the FAFSA to determine financial aid offers.
Review all aid offered, including which loans you qualified for and for how much. Carefully weigh each school’s expenses. From there, you’ll choose a school and decide which loans to accept.
Sign Up for Experian Boost and Experian Go
Anyone can sign up for Experian Boost, a free feature that allows users to contribute their on-time cell phone, streaming service, internet, and utility payments directly to their Experian credit report. But consumers with little to no credit and those with very poor to fair credit scores benefit most. The program is designed to help “credit invisible” customers build credit scores and histories without going into debt. Experian says that roughly 91% of consumers with no credit history who connect to Experian Boost and Experian Go have an average starting FICO score of 665 — near prime. About 87% of users who started out with a very poor score and 63% of customers with fair scores saw their scores increase.
More Ways to Improve Your Credit Score
If your credit score has already suffered, there are a few steps you can take to try to rebuild it.
Identify Problems and Fix Them
Review your credit reports regularly with all three major credit bureaus — Experian, Equifax and TransUnion. You can get free credit reports each year at annualcreditreport.com. Review them carefully and look for any accounts you don’t recognize. Those could be a simple mistake, but also could be a sign of identity theft.
Dispute any errors you find: The Federal Trade Commission found that almost 25% of consumers had mistakes on their credit reports. Errors can lower credit scores and hurt when you need a home loan or other financing.
Each credit bureau has its processes and methods, which can (and will) produce different results and findings. That means that even if one or two credit reports are error-free, it doesn’t mean that the other reports are correct.
Here are the steps you should follow to get credit report errors removed:
Dispute the Information With the Credit Bureau
If you find credit report errors, you can file a dispute — a formal challenge supported with new information. A dispute should be in writing and explain what the error is and why it is wrong.
Your dispute letter should also include your contact information and the tracking or I.D. number for the account in question.
Make All of Your Payments On Time
Make sure you make your monthly payment on time or a few days before if possible to avoid any hiccups. A single late payment can remain on your credit report for up to seven years.
Establish New Credit If Needed
We’ve already established that credit mix can make a difference in your credit score. Don’t open multiple credit card accounts, particularly if you’re already behind on payments or struggling with debt. Instead, look for a Payday Alternative Loan (this is very different from a payday loan), a credit-builder loan or a debt consolidation loan. If you don’t have issues with debt and are looking to build credit, consider a store charge card that you can pay off responsibly, or sign up for a program like Experian Boost so that you get credit for paying off your monthly bills on time.
Focus on Developing Good Credit Habits
Make yourself more aware of your credit habits. Try to maintain good payment history, low credit card balances, understand what makes up your credit score. Know your credit limits and why not learn about your debt-to-income ratio and credit utilization ratio. Sign up for a budgeting app, start a savings account and regularly monitor your finances.
Don’t Close Your Old Accounts
The average age of credit in your credit history is an important factor, so it’s important to keep your accounts — particularly the oldest ones — open. Use your credit cards occasionally, even for just a tiny charge at a vending machine, so the credit card issuer doesn’t close them due to lack of activity, and make sure to pay your bills. If your current credit card has an annual fee and you don’t want to pay it, ask the credit card issuer to downgrade your account to a no-fee product. As long as your account is in good standing, the credit card issuer should be able to transfer your available credit to a no-fee product.
Hire a Credit Repair Company
Credit repair companies work on behalf of consumers to erase negative information from credit card reports. Negative credit reports can deter a consumer from major life purchases like buying a home or a new car. However, most of them charge a fee, and it’s usually simple enough to do the same work on your own.
Consolidate your Debts
When you consolidate debt, you combine multiple debts, such as credit cards, medical bills, and other unsecured loans, into one monthly payment, hopefully with a lower interest rate. It can be a valuable financial tool if you’re overwhelmed with monthly payments, or just want to streamline your finances to decrease the risk of late fees. There are many options for debt consolidation loans, including lenders who specialize in loans for people with bad credit.
Apply for a Balance Transfer Credit Card
Balance transfer credit cards usually come with a low promotional annual percentage rate (APR) on balance transfers for a set period, typically between 12 and 20 months. The APR can be as low as 0%. The idea is to transfer debts to the new card and pay off that debt during the introductory period to avoid paying interest. These can be a great way to boost your credit score because you’re only dealing with one payment. The Catch-22 is that you’ll need to have fairly good credit to qualify.
When considering using a balance transfer card to consolidate debt, make sure the combined amount of debt you’re transferring is lower than your credit limit. And don’t forget to account for transfer fees and read the card’s fine print. You may find the APR for new purchases is different from the balance transfer rate, which could cost more if you make new purchases on the card. It’s best to use a balance transfer card only to pay the existing debt without incurring new debt. If you don’t think this is something you can manage, it’s better for you to try one of the other options.
Play the Waiting Game
It takes seven to 10 years for negative items to fall off a credit report, so you’ll need to be patient.
As you’re waiting for the old (but accurate) negative items to fall off your credit report, it helps to start managing your current credit. Start a savings account and try a budgeting app. Record your income and expenses. Take on a side gig if your expenses are greater than your income.
The Bottom Line
It’s definitely better to have no credit at all than to have bad credit because there are many more options to start building credit from scratch. Experian Boost can help you get an entry-level credit score just for paying your monthly streaming service bills.
But it’s more difficult to bounce back once you’ve got negative information on your credit report. It can take years to rebuild your score after only a few months of setbacks and missteps.
Regardless of where you stand right now, hope is not lost. There are ways, with patience, to get back on track if you’ve made some mistakes. But if you’re just starting out, you’ll face fewer obstacles. The key is to monitor your spending, pay your bills on time, use an app to help you keep track of your finances and always have a plan in case of a financial emergency.
A line of credit is a preset amount of money a financial institution i.e., a bank or credit union has agreed to lend you. You can take out money from the line of credit when needed, up to the maximum amount. You’ll pay interest on the amount you borrow.
AnnualCreditReport.com is an authorized online source, governed under federal law, to obtain free credit reports. It was created by the three credit bureau agencies so the public could safely request a report without paying unnecessary fees, often required by other untrustworthy credit report sites.
“Buy now, pay later” loans should not affect your credit score when you sign up for a plan. Most lenders run a “soft” credit check, meaning that your score should not decrease. Your payment history may or may not be reported to the credit bureaus, depending on the service used. It’s important to read the fine print to understand how the loan may affect your credit. If you use a service that reports to the credit bureaus, your payments will affect your credit score.
In the second quarter of 2020, people who got a new-car loan had average credit scores of 718, and those who got a used-car loan had average scores of 657, according to the Q2 2020 Experian State of the Automotive Finance Market report. Lower credit scores could result in fewer offers and higher interest rates.