What Does Having No Credit Mean?
If you have no credit, it means you don’t have the credit history needed to generate a credit score. It does not mean that your credit score is zero. You’ll need up to six months from when you opened your first credit account to establish a credit score, depending on the credit-scoring model.
You can end up with no credit in a few ways. Age is usually the main factor, but others come into play as well.
“We all start somewhere,” says Jeff Richardson, spokesperson for VantageScore Solutions, developer of the VantageScore credit-scoring model. “A person with no credit could be someone who is just turning 18 and entering the workforce or just getting out of college. It could also be someone who is just immigrating into the United States.”
If your credit cards are inactive for six months or longer and your auto and home loans are paid, you could end up with no credit history, Richardson adds. Also, some people have no score because they don’t use traditional credit products.
People who haven’t lived in the United States recently may have no credit. This can happen to immigrants who are new to the country or U.S. expatriates coming home after living abroad for at least several months.
Even if you have a credit history in another country, that doesn’t translate to a credit score in the U.S. A U.S. credit history requires U.S. credit activity. Still, a multinational bank may be willing to transfer your account activity stateside.
What Should I Know About Getting a Credit Card if I Have No Credit?
Having no credit can be a hurdle to getting a credit card but not a barrier. You shouldn’t expect to qualify for a top-of-the-line travel card with hundreds of dollars in sign-up bonus rewards, but you can access cards for people with no credit. The types of credit cards you can get if you have no credit are usually secured, student, retail or gas cards.
These cards typically have lenient qualification requirements, which means you could be approved, even if you don’t have a credit history.
Age can be a limiting factor, though.
“There are regulations on who can get a credit card and who can’t,” Richardson says. “If you’re a young person just turning 18 and you want to get a credit card, there are limits to what the issuer can do.”
If you’re under 21, card issuers must confirm that you can pay back on your own at least the minimum monthly payment for the account. Alternatively, you could get someone to co-sign on a credit card or add you as an authorized user.
When you are building credit from scratch, becoming an authorized user on someone else’s account may be the fastest track to accessing credit and establishing credit history. An authorized user is not responsible for paying an account, but the payment history appears on the user’s credit report and factors into the user’s credit score. You can even become an authorized user before you are 21.
For an authorized user who is new to credit, the experience may present teaching moments about credit cards, says Rod Griffin, director of public education at the credit bureau Experian. But, he warns, “That doesn’t mean you can go make lots of charges and hope the other person pays.”
What to Know About Getting a Credit Card With No Credit
If you get a card for consumers with no credit history, it will likely have a few flaws. Security deposits, low credit limits and above-average annual percentage rates are common.
With a secured credit card, you’ll often need to make a security deposit of between $200 and $2,500. Your credit limit is usually equal to the deposit, and the deposit is held until you close the account or upgrade to an unsecured card. Making a deposit can be an obstacle to getting a credit card but may be worth it if you can’t otherwise qualify.
Other types of cards for people with no credit may not require a security deposit but can come with other drawbacks. For one, credit limits are typically low, preventing you from charging much to the card.
And if building credit is your goal, a low credit limit can be a problem because of credit utilization.
A major credit score factor is credit utilization, or how much of your available credit you’re using. When you exceed 30% of your credit limit, it can reflect negatively on your credit score.
On a card with a low credit limit, blowing past a responsible level of credit utilization is easy to do. You only need to spend $150 to reach a 30% credit utilization rate on a card with a $500 credit limit.
“With these cards where the limit is low, it’s important to pay them off as you use them,” Richardson says. “Otherwise, with your one credit account, your utilization rate will be high, and your score will reflect that.”
How Can I Build Credit With Credit Cards?
Consider credit cards for no credit as a step on your path to good credit. The credit cards you can qualify for with no credit may not offer ideal terms, but they will let you show your ability to use credit responsibly. Eventually, you may qualify for cards with better terms.
“Credit cards are important for credit scoring because, unlike installment loans, a credit card gives you free will, and you decide how much you want to charge and pay each month,” Griffin says. “That free will gives a bit more insight into how you manage credit generally and can help increase your scores a bit more quickly.”
Setting a realistic budget, paying bills on time, limiting how much of your credit you use and only applying for as much credit as you need can help you get started with credit and build a solid score.
Start small with credit and limit card costs, Griffin suggests.
“If you make a small purchase each month, try to pay it in full so you can build a positive history and not pay interest,” he says.
Do your best to avoid impulse buying. Griffin says to stick to your card spending plans. “When you’ve got that card for emergency use, make sure it’s a real emergency,” he says. “Pizza and beer on a Friday night feels like an emergency, but it really isn’t.”