Have you been excited to add a new credit card to your financial arsenal—or apply for a car loan or apartment—only to be told you have an insufficient credit history? Don’t worry! This is perfectly normal, especially when you’re young. We all start out with insufficient credit experience until we take steps to establish some.
Let’s look at what insufficient credit history means, why establishing credit is important, and how to improve your limited credit history.
What does insufficient credit history mean?
In short, having insufficient credit history means you don’t have enough experience with loans/credit for the credit bureaus to assign you a credit score yet. That could mean you have no credit history at all. You’ve never had a credit card before, taken out student loans, gotten a car loan, etc.
Or, it could just mean that you have a limited credit history, and your accounts aren’t old enough to count yet. (More on this later!)
If you have insufficient credit experience, there’s no need to worry. No credit is not the same thing as bad credit. It really just means that you have a blank slate to start writing your story on.
How having insufficient credit history could affect your finances
While insufficient credit by itself isn’t necessarily a bad thing, it can make certain things more difficult at first. Yes, creditors don’t have any bad information about you, but they also don’t have any good information. You’re a total unknown, which does make you risky to lend to.
In practice, this means that you’ll have more difficulty getting approvals for loans or other applications that check credit. But these struggles will disappear as soon as you’ve established a less limited credit history. (And we’re here to help with that!)
Why having good credit is important
Let’s quickly look at a few of your incentives to improve your insufficient credit history. Having good credit can open a lot of doors for you, whether it’s:
- Qualifying for a new apartment
- Getting a good rate for a car loan
- Being approved for a mortgage
- Paying lower insurance premiums
- Getting credit cards with good rewards
- And more
Ultimately, credit scores in the United States can affect your life in a lot of ways. If you practice smart credit habits from the beginning, you’ll set yourself up for success from the get-go.
How much credit history do you need?
Is it difficult to build up a good credit score? Good news: it’s really not! If you start now, you can have a good credit score within the year.
FICO is right now the most widely used credit scoring model. In order to generate a FICO score, they state that you need at least one account that has been open and reporting to the credit bureaus for at least six months.
While you probably won’t catapult yourself into the “Excellent” range with one six-month-old credit account, you can certainly lay a good foundation.
4 steps to improve your limited credit history
If you have no credit history or a very new one, you should know that improving an insufficient credit history takes time. But you have a great opportunity to build a clean credit record from scratch!
Follow these steps to turn that insufficient credit experience into a great score that will benefit your future.
1. Apply for a beginner-friendly credit card
Because you’re a complete unknown to creditors, you aren’t going to qualify for top credit cards or high credit limits right away. Luckily, there are several options that won’t rule out people with insufficient credit history!
Check out cards in these categories:
Obviously, college students aren’t expected to have extensive credit histories. If you’re a current college student, check out student credit cards to build up your credit history early. My original credit card was a Discover student card!
Most issuers will verify your school enrollment in order to approve you. Many student cards don’t require you to have a credit score; they’ll just start you with a low limit at first.
Secured credit cards
Secured credit cards are kind of like a hybrid between credit and debit cards. You essentially put down a security deposit with the issuer, so they’re not taking any risks by lending to you.
Once they have your deposit, you’ll use the card just like any other credit card.
Make purchases and pay your bill on time each month. When your credit score is improved enough, you can upgrade or close the secured card and receive your deposit back.
You don’t have to get a credit card to establish a credit score, but it definitely helps!
2. Become an authorized user with someone else’s card
Got a trusted family member or BFF with a good credit score? They might be able to help you with your insufficient credit history by adding you as an “authorized user” with one of their credit cards. Your name and SSN will then be attached to that account, so you can share a bit of their good credit history.
The credit card issuer will send a copy of the card with the authorized user’s name on it. You can use it, but be wise and protect your relationships. Ultimately, the primary cardholder is still responsible for any charges made with cards connected to their account.
That said, the authorized user doesn’t even have to use the card in order to benefit from it! This is the beauty of it—there’s no financial stress or risk to either party involved.
I added my brother to one of my card accounts when he was looking to establish credit. When his card arrived, we just tossed it in a drawer and he never used it. Drawer or no drawer, it helped his credit just by being attached to my account.
If you become an authorized user, you can work out your own terms with your friend or family member. Maybe you need a credit card to pay a certain bill every month, so you use the authorized user card and then reimburse them with cash or a money transfer. It’s up to the two of you!
3. Look into “credit builder” loans
Credit builder loans are a lot like secured credit cards: loans that you back with an equivalent amount of collateral. You can choose the loan term and monthly payment amount that fits you. Your security deposit stays safely in a connected bank account until the end of the loan, at which point you can get it back.
In addition to helping fix your insufficient credit history, these loans can also help you save money! Unless you default on the loan, you’ll get all your money back (minus any applicable fees and interest) at the end. This keeps the money in a secure location and helps you meet short-term savings goals.
4. Pay your bills on time in full
No matter what kind of card or loan you start out with, there’s one single key to success. Always pay your bills! This shows that future creditors can trust you to pay your debts and loans, which boosts your score.
Paying your bills on time in full also saves you from paying late fees and interest. If you use credit cards wisely, you’ll never pay a single cent of interest! Pay off your entire statement balance each month and credit card debt won't ever be a source of worry for you.
Time to turn your insufficient credit history around!
Once you have a minimum of six months of history with some form of loan or credit line, you should be on the map with a shiny new score and less limited credit history! Improved credit history can help you with many things like buying a house or getting a new credit card.