How To Get Credit With No or Bad Credit

Get 3 facts about building credit when you have no or bad credit. 

Laura Adams, MBA
5-minute read
Episode #269


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I received an email from Amanda who asks:

“Recently my husband and I applied for a car loan with 2 different lendersbut got turned down. He was denied due to bad credit and I was denied for having no credit. I’m confused because the lenders showed different credit scores for him. How can we clear this up and improve our credit scores?”

Amanda’s question touches on several issues about credit scores that are commonly misunderstood. It’s important to know how the credit system works and to maintain good credit scores so you have the option to get credit when you need it.

Here are 3 facts about credit that everyone should know:

Fact #1: You Must Have Credit Accounts to Have a Credit Score

Lenders and merchants rely on credit scores to make decisions about potential customers. A credit score is a summary of the information in your credit report at the moment it’s reviewed.

If you have little or no credit history, there simply isn’t enough data in your file to generate a credit score. In other words, it isn’t that you have bad credit, but you have no credit! This is a common problem for young people and new U.S. residents who are just starting out. But in moment, I’ll tell you an easy way for anyone to build credit.

Your credit report can also be too thin to generate a credit score when your previous credit accounts have expired and fall off your credit file. For instance, if you pay off a student loan or decide to cancel a credit card, it only stays on your credit report for a certain period of time.

Closed accounts with negative information, like late payments, remain on your credit report for 7 years. Old accounts with positive information stay on your credit report for 10 years.  

Many financial obligations—like utility bills and rent—don’t affect your credit because they’re typically not reported to the national credit agencies, which are Experian, Equifax, and TransUnion.

So I recommend that Amanda maintain at least one credit card or installment loan in her name that reports payment information to the credit bureaus. Active accounts stay on your credit file indefinitely and ensure that you’ll always have enough information to generate credit scores.

Fact #2: You Have More Than One Credit Score

The fact that there are over a thousand different credit scores is probably the most misunderstood aspect of the credit system. Lenders can purchase credit scores from the 3 national credit agencies, from various credit scoring companies, or use their own credit scoring models.

There are credit scores for different purposes, like getting a mortgage, a car loan, or insurance. Different scores are used to measure different types of risk, such as the likelihood that you’ll repay a loan, declare bankruptcy, or even get into an auto accident. The bottom line is that companies use a variety of credit scores with different score ranges as tools to evaluate you.

Your credit score is kind of like your weight because it can change on a daily basis and depends on the scale you use. For instance, if you step on a scale that measures weight in metric kilograms you’ll get a very different number than if you use one that measures weight in pounds.

Additionally, it’s possible that not all of your payment data gets reported to each of the 3 credit agencies. Your creditors may choose to report data to just one or 2 of them. That means the exact same credit scoring model could give different credit scores depending on which credit agency the data comes from. So the actual credit score number isn’t as important as where you fall in its range from poor to excellent.

To sum up, the reason each lender gave Amanda’s husband a different credit score is probably because they evaluated him using different scoring models or because the scores were based on data from different credit bureaus.

Fact #3: You Don’t Need Debt to Build Credit

Many people mistakenly believe that they have to get into debt in order to build credit. That’s simply not true because you can use a credit card to improve your credit for free. Making credit card charges that you pay off in full and on time each month shows that you know how to use credit responsibly and it doesn’t cost you one penny of interest. 

If you can’t get approved for a regular credit card, everyone over the age of 18 can get a secured credit card. You’re required to make an upfront, refundable deposit that becomes security for your available credit limit. You choose the deposit amount, which could range from $200 to $3,000.

Using a secured credit card that reports transactions to the credit agencies would be an easy way for Amanda to establish a credit history and for her husband to improve his low score. The card company may even give you the option to convert to a regular, unsecured credit card after you demonstrate that you can use a secured card responsibly.

Best Secured Credit Cards

The best secured credit cards don’t require you to have any credit history or a minimum credit score for approval. Here are 2 that report payment information to the nationwide credit agencies (the only way to build your credit) and have very low fees:

How to Raise Your Credit Scores

As you can tell from Amanda’s dilemma, having no credit is just as problematic as having bad credit. Building up and maintaining good credit is critical to your overall financial health because it allows you to borrow money for emergencies or planned purchases at the lowest possible interest rates.

Plus, having good credit gives you other benefits like getting competitive quotes for insurance, paying lower security deposits, and impressing a potential landlord or employer.

To raise your credit scores, your goal should be to improve the information in your credit reports by maintaining active credit accounts, making payments on time, and not maxing out credit cards.

Also, watch for errors that could be hurting your credit scores. The law entitles you get each of your 3 credit reports for free once a year and to get any inaccuracies corrected in a timely manner at annualcreditreport.com.

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More Articles and Resources You Might Like:

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FAQs About Your Credit Score

What to Know Before You Cancel a Credit Card

How to Get Free Credit Scores
Open Sky Secured Visa® - a secured card that allows you to build credit from scratch

Download the Credit Score Survival Kit – a free download with smart strategies to raise your credit score fast!

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.