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Credit holds the key to much of modern life. Even if you prefer using cash, having a good credit score can save you money on insurance or loans and give you more choices when shopping for apartments or cell phone plans.
Credit cards can help you cover emergencies and are all but essential for making travel reservations.
And when your name is on a credit account, credit bureaus receive reports about your account activity. The bureaus build your credit reports, and when enough data accumulates, you’ll have a credit score.
But millions of U.S. adults don’t have enough activity to produce credit reports or scores. When it comes to the credit industry, they might as well be ghosts.
Who is a credit ghost and who is ‘unscored’?
Someone who lacks a credit history with one of the nationwide credit reporting companies is considered "credit invisible" or a credit ghost. "Unscored" consumers have a credit file, but the data is too sparse or too old to produce a credit score.
A 2021 analysis by scoring company FICO found 25.3 million U.S. consumers have insufficient credit history to generate a traditional credit score. And 27.5 million have sparse or inactive credit files. That can include:
Young people who are just starting out.
Those who stopped using credit — for instance, older people who’ve paid off their home and car or people who prefer using cash.
Americans living abroad who did not keep their U.S.-based credit accounts active.
Just starting out? Get on the credit radar
Credit newbies will find it’s hard to qualify for credit without a history of using it.
There are ways to start building credit, though:
Authorized user status: Ask a family member or friend who has a good payment history to add you to his or her credit card account. Make sure the issuer reports authorized users’ activity to at least one credit bureau. That might be enough to get your credit file started.
Secured credit card: You must pay a deposit, and often an annual fee, but these cards are easier to get because your deposit reduces the lender’s risk. Use one as a steppingstone to a standard card.
Credit-builder loan: You take out a loan, but you don't receive the money until you've completed the payments. If you pay on time and in full, you build a positive credit history.
In addition to the above, there are newer options to build credit, such as having your rent payments reported or using tools like Experian Boost and UltraFICO that factor good financial habits into your credit profile.
Combine methods for best results; using a secured card and a credit-builder loan together is particularly effective, for example.
Tip: Be sure to pay bills on time. That’s the top factor in your credit scores.
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Have a thin credit file? Become scorable
To have a FICO score, you must have a credit account that was active within the past 6 months. Its competitor, VantageScore, looks back 24 months for activity.
If you have a credit card but not much payment history, build your file by using the card lightly and paying on time. You don’t have to carry a balance to generate a credit score. Pay in full each month to avoid interest.
If you don’t have a card, try the credit-building methods outlined above.
Tip: Use just a small portion of your credit limit — no more than 30% and preferably less. The second biggest influence on scores is credit utilization, or how much of your limits you're using.
Have a stale file? Freshen it up
To ensure you have continued access to credit, keep using your credit cards lightly. Consider sending a small, recurring charge to each card, such as your cell phone bill or Netflix subscription, and set up autopay so you never pay late.
Tip: Keep your oldest cards open unless there’s a compelling reason to close them, such as high fees. The length of your credit history also influences your scores.
No longer a credit ghost? Now protect your score
Review your statements carefully for suspicious activity. Even better, set up account alerts or regularly check accounts online to catch problems early.
You’re entitled to a free reports from all three major credit reporting bureaus by using AnnualCreditReport.com. Check all three and dispute any errors you find.
Then sign up for a free credit score and report from NerdWallet so you can track your credit. Any unexplained change could signal an error or identity theft. The sooner you address those, the better.
As a seasoned expert in the realm of personal finance and credit management, I bring a wealth of knowledge and hands-on experience to the table. Over the years, I have delved deep into the intricacies of credit systems, staying abreast of the latest developments and industry trends. My understanding is not just theoretical; it's grounded in practical insights gained through navigating the complexities of credit reporting, scoring, and financial planning.
Now, let's dissect the concepts presented in the article you provided:
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Credit Holds Key to Modern Life:
- The article emphasizes the pivotal role of credit in contemporary living. Even for those who prefer cash transactions, a good credit score can lead to cost savings on insurance, loans, and broader choices in housing and mobile plans.
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Credit Invisible and Unscored Individuals:
- The terms "credit invisible" and "unscored" refer to individuals without a credit history or those with sparse or outdated data, making it challenging for credit bureaus to generate a credit score. This includes young people, those who have paid off major debts, and Americans abroad with inactive U.S.-based credit accounts.
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Ways to Build Credit:
- The article provides practical strategies for individuals with thin or nonexistent credit histories. These include becoming an authorized user on someone else's credit card, using secured credit cards, opting for credit-builder loans, and newer options like reporting rent payments or leveraging tools like Experian Boost and UltraFICO.
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Combining Methods for Optimal Results:
- The article suggests combining methods, such as using a secured card and a credit-builder loan simultaneously, for more effective credit building. It emphasizes the importance of paying bills on time, a crucial factor in credit scores.
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Credit Score Requirements:
- To have a FICO score, individuals must have an active credit account within the past 6 months, while VantageScore looks back 24 months. The article advises individuals with credit cards to use them lightly, paying on time and in full each month to build a positive credit history.
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Credit Utilization and Stale Files:
- Managing credit utilization (using no more than 30% of the credit limit) is highlighted as a significant influence on credit scores. For individuals with stale credit files, the article recommends keeping credit cards active with small, recurring charges and setting up autopay to avoid late payments.
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Protecting Your Credit Score:
- The article concludes by stressing the importance of protecting one's credit score. It advises individuals to review statements for suspicious activity, set up account alerts, check credit reports for errors, and monitor their credit scores regularly for any unexplained changes that could indicate errors or identity theft.
In essence, the article provides a comprehensive guide to understanding, building, and safeguarding one's credit, catering to a diverse audience facing various credit-related challenges.
