Do You Have Insufficient Credit History in 2021

Do You Have Insufficient Credit History in 2021? Here’s What To Do

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What does insufficient credit history mean?

Insufficient credit history means that you don’t have enough experience as a borrower for a lender to approve you for a credit card or loan. Without a sufficient amount of information in your credit report, a financial institution cannot predict how you will handle borrowed money as accurately. So it’s common to see the term “insufficient credit history” on a letter of denial from a lender. But it may come up other times, too, like when you’re apartment hunting. Renters with insufficient credit history are more likely to be asked for money upfront.

If you’re trying to overcome an insufficient credit history, you have a handful of options you can try to get it moving in the right direction.

There are four primary ways we recommend to jumpstart your credit profile:

  • Check that your personal information is correct. Sometimes, lenders can have errors with your personal information, causing your credit to erroneously show up as insufficient. 
  • Ask your service providers. If you can convince your cable company or cell phone provider to report your on-time payments, you will build credit history quickly.
  • Apply for a secured credit card. When you make on-time payments with a secured credit card, they get reported to the credit bureaus, helping to establish your credit.
  • Take out a mini-loan. While risky because of the high interest rates, mini-loan payments also get reported to the bureaus. 

How Credit History Contributes to Credit Scores 

Although nearly 90 percent of consumers begin to accumulate credit history in their mid-to-late twenties, the CFPB reports that more than 11 percent of adults in 2010 were “credit invisible,” which means they don’t just have an insufficient credit history—they have zero credit history. 

The three major credit bureaus—TransUnion, Experian and Equifax—are tasked with collecting and maintaining the creditworthiness of the general population. Lenders and other parties interested in someone’s creditworthiness can make an inquiry into the borrower’s credit score. These scores can range from 300, which is extremely poor credit, to 850, which is exceptionally good credit. 

According to FICO, the algorithm for calculating a credit score contains five components that are assigned the following weights: 

  • 35 percent | Payment history
  • 30 percent | Amounts owed
  • 15 percent | Length of credit history
  • 10 percent | Credit mix
  • 10 percent | New credit

Looking at this breakdown, it’s clear that the most important aspect of your credit score is making regular, on-time payments for amounts greater than or equal to the minimum amount due. It’s also important to maintain a low debt-to-income ratio, which means the amount of debt you owe should be relatively low compared to your income.

The various credit reporting bureaus have slightly different methods of calculating your credit score. TransUnion, for example, reports that payment history accounts for 40 percent of the score and the length of credit history accounts for 21 percent.  

Here’s what insufficient credit history means and how to fix it:

  • Insufficient credit history is a term that lenders use to tell you that there is not enough information in your credit report to approve you for a loan or credit card.
  • If you have insufficient credit history, it might mean that you have less than 3 years of recent credit experience, a track record of credit mistakes, or just not enough experience with different types of borrowing.
  • Insufficient credit history is something you can start to change in as little as a month. One way to start is to become an authorized user on someone else’s credit card. Or, you can apply for one of the many credit cards for people with limited or bad credit.
  • There are plenty of credit cards for people with insufficient credit history, including secured cards (easiest to get, thanks to a required security deposit) and unsecured credit cards designed for applicants with limited or no credit history. As long as you have some form of income, you should be able to get a card.
  • You can ask your local bank or credit union if they offer credit-builder loans. This involves the financial institution depositing a small sum of money in your savings account, which you then repay over an agreed-upon number of months. The lender reports your payment history to the credit bureaus each month. And you get access to the savings account afterward.

You don’t need to feel too stressed about having an insufficient credit history. But you should also strive to start building credit as soon as possible. Getting a credit card, making small purchases each month, and always paying your bill (in full) by the due date will set you firmly on the credit-building path.

How long does it take to overcome insufficient credit history?

Generally speaking, to overcome insufficient credit history, it can take a month to six months.

The key is that you have to be consistent paying your bills to build up the data required to give you a good credit score. So, be patient and prompt with your payments and your credit history will start to build in due time. 

It really is a game of trust and patience, and you’re being handed an opportunity to show that you can pay your bills on time. As long as you keep up with payments, then the more likely you are to gain yourself a good credit score and sufficient data to earn a good credit history. Make sure that you keep all of your balances low on credit cards and don’t try to move the debt around by paying off credit debts with other credit cards.

How to Build Credit History

Unfortunately, there are no quick fixes for insufficient credit history. The only way to build trust with lenders is to make consistent payments on your debts over time.

The best way to fix insufficient credit history is to start building your credit now. A secured credit card, for example, allows you to build credit without taking any of the risk associated with borrowing money. You must maintain responsible purchasing habits and make regular payments to prove your creditworthiness. 

When your credit history is insufficient, there are some strategies to proactively build credit and work toward a higher credit score. Although there is no way to speed up the process of credit history, follow these steps to build a better history of creditworthiness. 

1. Review Your Credit Report for Errors

According to FICO, a study by the FTC discovered that 26 percent of people have had at least one error on their credit report. If you have a lower than anticipated credit score or none at all, review your credit report and dispute any errors with the credit bureaus. This is where a credit repair company can potentially help you. 

If you’re deemed to have insufficient credit history, but you believe you have established credit, first consider whether it’s been more than six months since you last paid a debt in case your credit history has lapsed. Otherwise, confirm that all personally identifiable information (such as your legal name, Social Security number and driver’s license number) is accurate on your loan application. 

If your legal name is even slightly misspelled or is missing a suffix (Jr., Sr., I, II, III, etc.), your credit report could be incorrect.  

2. Get a Secure Credit Card

If you have no credit and therefore no credit history, you will find it difficult to get approved for a loan. Instead, you should consider secure credit cards as a stepping stone to getting more credit. 

Secure credit cards are backed by a cash deposit instead of your promise to pay the lender back (i.e., credit). Once you have made good on your promises to pay back all purchases and interest charges on your secured credit card, you can transition to an unsecured credit card. The unsecured credit card is usually when your credit history begins, and six months later, you will likely have a credit score. 

3. Pay Your Bills on Time 

Since between 35 percent and 40 percent of your credit score is calculated based on your payment history, you should be diligent about paying your bills on time and in full. Anyone that extends you credit, in the form of debt, expects to be paid back at regular intervals and for at least the minimum amount due. Late or incomplete payments may negatively affect your future credit score.  

4. Maintain or Reduce Debt-to-Income Ratio

With 30 percent of your credit score depending on the amount you owe to lenders, maintaining a healthy debt-to-income ratio is recommended. If possible, pay off balances every month instead of building up debt levels that become unsustainable. 

As you now know, establishing credit and credit history is important, but the work doesn’t end there. It’s essential to monitor, maintain and, if needed, proactively work to boost your credit score. Late payments, collections, defaults, and bankruptcies can have a negative impact on your credit report for as long as 10 years.  If you feel your credit score does not accurately reflect your credit history and creditworthiness, the credit repair services offered by Lexington Law can help you dispute inaccurate negative items on your report. Learn more about this possibility today.

How to Get a Credit Card With No Credit History

As mentioned above, an easy option when you don’t have a history is to apply for a secured credit card, where you deposit some money into an account and the bank or other financial institution uses that money as your credit limit and as a way to secure that you will make your payments. If you were to fail to make your payments, the company would take the money you deposited to recover their losses (and report that you didn’t pay to the credit reporting agencies, which would be bad for your credit score).

Regular credit cards are unsecured, meaning the company is betting on your positive credit history that you will make your payments. It’s difficult to get an unsecured card when you don’t have a history. The easiest way to do this would be to become an authorized user on the account of a family member or friend or to have them sign on to join an account with you. Again, you would need to be sure that you can make these payments on time, and that the person you signed on with had a good credit history and was comfortable doing this with you. If either of you didn’t make the payment on time, both of your credit scores would suffer.

Once you have built up a good credit history, you will be able to get an unsecured credit card on your own and be offered a low-interest rate. Until that time, it will be difficult for you to get approval on your own, and when you do, you will be offered very high-interest rates.