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Insufficient Credit History: How to Fix this Problem

So you want to apply for a loan but you find yourself wondering how to get a loan with insufficient credit history.

Well, your credit history is an essential part of your financial life. It's what lenders use to determine if you are creditworthy. If you have no or bad credit history, it will be difficult for most lenders to give you good interest rates on loans and other forms of credit.

Fortunately, there are ways to build your credit history if you don't have any. Here's everything you need to know about fixing your insufficient credit history.

What is a Credit History?

Your credit history is a record of your borrowing and repaying money. It is tracked by credit bureaus that you must authorize to track your financial information. Credit agencies collect this information on their own or from lenders such as banks and credit card providers (CCPs). They add the data to your file, and it becomes part of your credit history.

Your credit history plays a huge role in your financial life. Lenders use it to determine if you are a good credit risk. If you have a poor or insufficient credit history, chances are you won't get to borrow money at reasonable rates. This is why it is so important for everyone to build up their financial profile by improving their credit history whenever possible.

What Does Insufficient Credit History Mean?

Insufficient credit experience is when you don't have enough credit information to generate a full picture of your financial life. This means that it is harder for lenders to determine if you are a good risk or not. If your credit history has nothing in it, then it is very likely that you will have to pay higher interest rates on loans and other forms of credit.

No Credit History vs. Bad Credit History

Not having any credit history at all is very different from having a bad one. If you have no credit history, then it means you've never borrowed money before, so there are no repayment records to go on. This isn't necessarily a problem, but lenders will be reluctant to extend too much credit because they don't know anything about your financial behavior or history.

If you have a bad credit history, that can indicate that you've made poor financial decisions in the past and repayment problems are inevitable. This is more of a problem than not having any records because lenders will be more reluctant to extend credit.

Credit Invisible vs. Credit Unscored

There are many people who are credit invisible. This means they have no credit history because they haven't borrowed any money before. To lenders, these individuals are basically invisible to them - it's hard for them to assess anyone's creditworthiness if there is nothing in their records.

Credit unscored individuals, on the other hand, have a very limited credit history. This means they have borrowed very little before, if at all. Lenders don't know much about these individuals either because there is nothing to go on. However, unscored individuals are sometimes referred to as subprime borrowers, making them sound like bad credit risks even though many are not.

Why Is A Lack Of Credit History Bad?

Having not enough credit history can result in many problems.

Consequences Of Not Enough Credit History

  • You might not qualify for a loan or credit card: If you don't have any records of borrowing and repaying money, then it will be difficult to get approved for a loan.
  • Lenders need to see that you can borrow and repay money responsibly before they extend credit to you. They won't take your word for it because that could be a lie. Then again, if you have no records of financial behavior, there's not much they can go on, so many lenders will consider you too risky to lend.
  • If a lender does extend a loan your way, chances are that you will have to pay higher interest rates on it. Some unscorable borrowers have reported that they were forced to pay 10% or more above the Prime Rate, which is not good for their finances.
  • You might have trouble renting an apartment. Without a credit history, it will be difficult for them to assess your financial background and determine how reliable a tenant you would be. If they sense that you are a high-risk tenant, then there is a good chance that they won't rent to you unless you have someone cosign the lease agreement.

How To Build Your Credit History

Luckily, there are several steps you can take to fix your insufficient credit history on file. Here's what you need to do:

Get a credit card.

The most effective way to build your credit history is by getting a secured credit card from a reputable issuer. You can't get approved for an unsecured credit account because you don't have enough information on file, so make sure the card issuer won't require a security deposit which you'd lose if you default.

Make small but regular payments.

Once you get a credit card, make sure to use it regularly. Payments less than the minimum often won't affect your score, so try to pay at least 5% of your outstanding balance every month. This way, lenders will see that you can repay whatever money you borrow in a reasonable time. This can also prevent you from accumulating too much debt, which is something that will hurt your score in the long run.

Close unused accounts.

If you have some credit accounts but haven't used them for months, then it might be a good idea to close them. Simply call up your issuer and ask for account closure. This can reduce the number of accounts where you are shown as the primary account holder. On the other hand, having too many credit accounts can make it look like you are over-extending yourself, so consider closing unused ones to improve your score.

Don't go overboard with credit cards or loans.

Borrowing money is a good way to build your credit history but don't do it excessively. You should only have a card with a small limit, so you don't risk going over your head and getting overextended. Also, try to keep your outstanding credit card balances below 50% of your credit limits to avoid having a high utilization ratio, which can also hurt your score.

Credit reporting errors can be corrected.

You might find that you have erroneous information on your credit reports that need to be removed right away. The Fair Credit Reporting Act (FCRA) requires credit bureaus and lenders to remove consumer data if it's there in error, so make sure you don't overlook this important step. You should also monitor your credit reports regularly to check for any new errors that might pop up over time.

Fix Your Lack of Credit History with Help from Kovo

With financial wellness education from Kovo, learn to create better financial habits that will build up your credit score. Get in touch today if you'd like to learn more about how you can improve your finances and get a handle on your debt.