Insufficient Credit History: What You Need to Know

Credit Invisible

By John Egan and Eric Rosenberg

Insufficient credit history. Those three words can send a chill up your spine — and can seemingly freeze your finances — when you’re applying for a credit card or loan.

Experts stress that being told you’ve got an insufficient credit history doesn’t mean you’re out in the financial cold. In fact, they say, being slapped with the “insufficient credit history” label is not cause for gloom and doom. So what does insufficient credit history mean?

“Insufficient credit doesn’t necessarily mean that you have late payments or any negative information in your credit reports. It’s more likely that you simply don’t have enough data in your history to generate a credit score,” personal finance expert Laura Adams says.

Receiving an “insufficient credit history” notice is common when you are young and have never applied for a credit card or loan, Adams says, or when you’re trying to build your credit. In 2015, the federal Consumer Financial Protection Bureau (CFPB) reported that one of every 10 American adults is “credit invisible,” meaning they don’t have a credit history with one of the three major credit bureaus.

Clearing up the term insufficient in personal finance

Finance is full of acronyms and complicated terms, and the word insufficient comes up again and again. If you don’t know the difference between insufficient credit history, insufficient funds, and insufficient number of accounts, start here.

Insufficient credit history

When applying for credit, lenders are only allowed to use a specific set of criteria to evaluate your application. Insufficient credit history, what this article is all about, indicates that the applicant doesn’t have enough accounts with a long enough history of positive payments to approve an application. Banks, cell phone companies, and utility companies also look at this information when you set up a new account.

Insufficient funds

Most commonly seen with checking accounts, insufficient funds or nonsufficient funds (NSF) means you tried to make a withdrawal or debit card purchase that took your account balance below zero. Many banks charge a fee for this, though you can find banks with no overdraft fees or the option to turn off approvals of transactions that would overdraw your account.

Insufficient number of accounts

As you apply for bigger loans, lenders want to see that you can handle multiple accounts responsibly. If you only have a single credit card or too few accounts overall, you could get this reason for rejection on a credit application.

The next time you head to the bank or work through a financial decision online, you’ll know what you’re talking about. This can help you navigate the process of applying for a new loan and getting the best possible rate.

The role of your credit score

No matter what age you are or where you are in your credit-building journey, a lender typically relies on a credit score to help decide whether to approve you for a credit card or loan. A three-digit credit score — usually anywhere from 300 to 850 — normally dictates whether you’ll qualify for a credit card or loan.

The higher the score, the better your chances are of being approved for credit and of getting an attractive interest rate. In general, a good credit score is 700 and above. Insurance companies also lean on credit scores for premiums. Adams explains that different credit-scoring models look at factors such as whether you pay on time, how many accounts you have, the amount of your outstanding balances and the length of time you’ve had credit.

When your credit history contains information that can’t be verified — such as your birth date or Social Security number — or, more likely, shows you’ve had credit for just a few months or never at all, the scoring system might stamp your credit history as “insufficient” and not generate a credit score, credit experts say.

In a nutshell, the credit card issuer or other financial institution doesn't have enough information to determine your ability to repay, whether it's an auto loan or credit card debt. And that's a risk for them.

Are you ‘credit invisible’ or ‘unscored’?

Broadly speaking, consumers with limited credit histories fall into two categories, the CFPB says. The first category is consumers without any kind of credit report generated by a credit bureau — otherwise known as “credit invisibles,” the bureau says.

The second category, called the “unscored,” includes consumers who don’t have enough credit history to produce a credit score or who have credit reports that contain “stale” information.

“Without a credit score, a potential lender is missing a key factor they rely on to know if they should do business with you,” Adams says. “When they can’t get clear evidence that you’re a low-risk customer who pays bills on time and manages money responsibly, they turn you down.”

David Bakke, a contributing writer for the Money Crashers personal finance website, says the “insufficient credit history” designation can put you in a bind: You can’t qualify for a credit card or make a successful loan application, but you need a credit history to secure a credit card or loan.

For the most common credit-scoring models, the CFPB says, you might run into trouble getting a credit score if you:

  • Don’t have at least one credit account open for at least six months.
  • Don’t have at least one update in the past six months on a credit account where you haven’t filed a dispute.

No credit history vs. bad credit

Even if you do have a credit score, some lenders will consider your credit history insufficient for loan approval depending on how long you’ve had a credit account and how many credit accounts you have, the CFPB warns. And in some cases, the bureau says, you might get credit without a credit score but you’ll be hit with a higher interest rate.

“In the credit-scoring world, having no credit history is almost as bad as having a history of poor credit use,” says Joshua Heckathorn, president of Creditnet.com, a credit card comparison website. “And without a credit score, you will have trouble getting approved for credit cards, auto loans, mortgages, or even an apartment or new cellphone.”

Adams notes, however, that if you’ve been rejected by one creditor for a credit card or loan because your credit history is insufficient, another creditor might accept you because it uses a different credit-scoring model or has manual underwriting.

Checking your information

So, what should you do if you’ve been branded with the “insufficient credit history” tag? First off, don’t panic, Heckathorn says. Secondly, figure out why your credit history has been marked as “insufficient.”

If you suspect your credit history is insufficient because of a data problem, contact your lenders and check whether your personal information on file with them is correct, credit expert Kevin Haney says. This includes your name, address, Social Security number and birthdate.

When applying for credit, it’s best to be consistent with the name you use, according to Haney. For instance, confusion can arise if you go by “John Smith Jr.” on some applications but “John Smith” on other applications.

Fixing an insufficient credit history

Updating the personal information in your credit history is relatively easy. Beefing up your credit history is another matter and credit experts emphasize that it isn’t a quick fix. For teens, see our guide to building credit from scratch at 18.

Learning that your credit history is insufficient “should be a financial wake-up call to take action and start working on building a solid history of responsible credit use,” Heckathorn says.

The good news is that it takes just one account to establish a credit file. Student loans are often one of the first types of credit younger people access.

Experts offer these four suggestions for changing your credit history from insufficient to sufficient:

1. Pay your bills on time

Chances are, you pay rent, electric bills, cellphone bills or insurance premiums every month. However, your landlord and service providers usually report only bad things — such as late or missed payments — to the credit bureaus.

To help build a credit history, ask your landlord and your services providers to report your positive bill-paying record to the credit reporting agencies. Remember, though, that you’ve got to keep up the good behavior to improve your credit.

2. Apply for a secured credit card

Obtaining a secured credit card doesn’t always hinge on your credit score, Bakke says. Rather, the credit card companies require you to deposit some of your own money to get the account going, Heckathorn says. For instance, a $300 deposit will give you a $300 credit limit.

“Use the secured card to make small charges, pay off the balance in full and on time each month, and in about six months you should find yourself with a credit score,” Heckathorn says.

Most credit cards are unsecured cards, meaning that you don’t have to come up with a cash deposit to acquire one.

3. Seek help from a friend or relative

One avenue for building your credit history is being added as an authorized user on a credit card held by a friend or relative, Bakke says. If the cardholder handles the card responsibly, that positive activity will be reported — in your name and the cardholder’s — to the credit bureaus.

“This is an easy process to go through with the credit issuer,” Heckathorn says, “and the account should then show up on your credit reports and help establish a history of credit.”

Be warned though, if the cardholder doesn’t handle the card responsibly, the negative information will also be reported to the credit bureaus.

4. Get a credit builder loan

A credit builder loan is a good option to establish credit and save money in the process. You can often find these at a local credit union and online from Self.

A credit builder account is a small personal loan secured by a Certificate of Deposit (CD). When you're approved for the loan, the funds are placed in a CD so you don't have to come up with the deposit up front. Your monthly loan payments are reported to the credit bureaus to establish and build payment history. At the end of the term, you get your money from the CD.

5. Take out a personal loan

Even if you have an insufficient credit history, some lenders will overlook the absence of a credit score and extend a personal loan to you. A personal loan isn’t secured by collateral like other installment loans, such as a car loan or a mortgage.

Keep in mind, though, that if you lack a credit score, you’ll likely wind up paying a higher interest rate to borrow the money and, in the end, owe more money. Bakke suggests shopping around to find the best interest rate.

Under this scenario, credit expert Michelle Dunn recommends stashing the cash you borrow through a personal loan — $2,000, for instance — rather than spending it, then making your loan payments on time every month until the debt is erased. Responsibly paying off the loan will be reflected in your credit history as “good credit,” Dunn says.

Dunn goes so far as to suggest wiping out the loan debt early. However, she says, be sure you won’t be penalized for an early payoff.

Checking accounts and debit cards don’t count for credit

If you have a checking account, savings account and debit card, you are using popular and common tools Americans use to manage their money. However, those accounts don’t help your credit. In fact, your checking, savings and debit card don’t show up on your credit report at all.

If you have a string of overdrafts, that doesn’t mean someone isn’t paying attention. Other types of consumer reporting companies, namely ChexSystems, do keep tabs on this kind of activity. But these are not credit accounts, so they don’t directly help or hurt your credit in any way.

Unfortunately, that also means having a checking account doesn’t count toward avoiding that “insufficient credit history” denial. You have to open actual credit accounts to help your credit report and credit score.

Overcoming a short credit history

Some lenders will overlook an insufficient credit history if the applicant is really strong in other areas. This may mean you have to go through manual underwriting, where a person reviews your finances and application, instead of an automated, digital process.

Two major factors that work in your favor are a strong income and good income relative to your monthly debt obligations. Showing a steady proof of income tells lenders you are a safer bet. A high income compared to your monthly payments due means you are more likely to be able to handle a new payment if you are approved.

Of course, it’s much easier if you also have good credit. If you are on the fence, consider adding a new credit line, like one you could get with Self, to your credit report. Every new (on-time) monthly payment could get you closer to having a solid, sufficient credit history.

It takes time

Regardless which methods you adopt to turn around your credit rating, remember that it won’t happen overnight.

“It simply takes time to build a rich credit history that demonstrates you handle credit responsibly and are a good bet for a potential lender,” Adams says. “As the length and breadth of your credit history grows, your credit score will increase and you’ll have opportunities to open new credit accounts.”

See our article about how long it takes to build credit.

About the Authors

John Egan is a personal finance writer who has written extensively for publications such as BankRate, Credit Karma and Lending Tree.

Eric Rosenberg is a former bank manager and corporate finance worker. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other fine websites and publications.

Written on August 8, 2017

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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