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What Does it Take to Have a Credit Score?

May 4, 2011 By

GiveMeSomeCredit_Andy_CCFlickrWhile having a credit score won’t solve all your problems, it can certainly make your life a bit easier when it comes to financing a new car, purchasing a home, securing cell phone service or getting a line increase on your credit card.  Obviously, it really helps if your score also shows that you’re a low credit risk!

While the majority of U.S. consumers above the age of 18 have a credit score, there are millions of people who don’t have a credit report or credit score.  For example, young people who are just entering the credit market, recent immigrants to the U.S., consumers who opt to use cash or other non-credit payment options and people who are not recently active with their credit.  While no one knows the exact number of consumers who don’t have a credit score, estimates range from 30 to 50 million people.  That’s a lot of people who—either by choice or circumstance—fall outside of our “mainstream” credit system.

[Article: How Credit Inquiries Affect Your Credit Score]

While the exact criteria required to have a credit score varies by the different credit scoring systems used, all require some degree of credit history on a credit report in order to generate a score that is predictive of a consumer’s future credit risk.  For a FICO score to be generated, a credit report must contain at least one credit obligation that has been open for 6 months or longer and has been updated/reported on in the last 6 months (and no deceased status on your report).

For example, under this criteria, a person with just one credit account (a Sears credit card, for example) that was opened 8 months ago and updated (or reported on) two months ago would meet the minimum criteria required to be scored.  Conversely, a person with 15 credit accounts that have been paid off with the most recent activity being reported 10 months ago would not meet the minimum scoring criteria—and would, therefore, not have a score.

For consumers who have existing credit, this is why it is important to use it periodically.  For example, make a small purchase using an existing credit card and pay if off in full when the bill is due.  That way, you can maintain your credit score should you need credit in the near future.

[Featured tool: Get your free Credit Report Card from Credit.com]

The process is a bit more challenging for consumers who have no credit history.  It’s a “catch-22,” in which you need to have credit to be able to get it.  So here are a few tips on how to establish credit:

  • Credit unions, as they are membership-based, may offer products and services and/or special programs designed to help members who are new to credit.
  • Many banks offer secured credit cards.  This is where the available credit line (or portion of that credit line) is secured against a deposit that you’ve provided.  These secured cards are usually reported to the credit bureaus just like a regular credit card (be sure to confirm this with the bank before signing up).  As it is reported, it will help you build your credit history.
  • Ask a family member or friend to co-sign or be a co-applicant with you on a loan or line of credit.  Once approved by the lender, it will be reported on both applicants’ credit files. There is a big caveat to this approach, however. You want to make sure their credit is good (it needs to be if the lender is to approve the request for credit), and remember both parties will be liable for the payment of the credit if it is granted. This means if you manage the account poorly, your co-signer’s credit will suffer as well as your own.
  • Ask a family member or friend to place you as an authorized user on their credit card account.  Once approved by the lender, the history and activity of that credit card will be reported on both of you to the credit bureaus.  Again, enter into these relationships carefully as you want to make sure they are paying as agreed/carry low balances on that credit card.  Also note, any negative information on that card (historical or in the future) will be provided to the credit bureaus and could negatively impact your score.

Your credit score is an important part of your “credit DNA”—don’t take it for granted.

Image: Andy, via Flickr.com

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Let Family be Family, Leave the Lending Business to the Banks

August 26, 2010 By

I remember when I was in high school and Friday night rolled around.  As most 17-year-olds, I was as broke as an old clock.  And, WOW, what $20 could buy in 1985.  So like most young kids do, I asked Banco Padres (the parent's bank) for $20 on a regular basis.  And it wasn't a loan for $20, because if it was then I defaulted on every single one of them.

So when is it time to stop asking family and friends for money?  It's my opinion that you should never, ever ask anyone other than a bank or some other form of official lender for money, ever.  Here's why...

  1. Most "loans" are paid back under the terms of a promissory note.  Borrowing dough from mom and dad is not.  It's paid back under some loose assumption of terms, which often leads to misunderstandings and hurt feelings.  And nothing makes Thanksgiving dinner more uncomfortable than the elephant in the room, which is "the guy carving the turkey owes me $10,000."  

  2. Co-signing is a temptation, which is fraught with peril.  Co-signing for a loan or anything for that matter is the financial equivalent of getting married.  You are officially connected and getting disconnected, which might seem really attractive, is next to impossible.  Lenders love two liable parties instead of just one.

  3. "He who gets gypped has the memory of an elephant."  Notwithstanding the fact that I've now mentioned elephants twice in this article, the quote rings true.  I can't remember who gave me what at my wedding, but I sure can remember the folks who gave us nothing.  It's human tendency to remember these things and nothing is worse than the constant memory of getting ripped off, by a loved one.

  4. Save the lending to the lenders.  Lenders are expected to be cut throats.  They'll report you to the credit bureaus, hire collectors to track you down, and might even sue you for delinquencies.  Do you really want to put your loved ones in that position?

Here's my suggestion, if you are seriously thinking of letting someone borrow money, just let them have it.  That way there's no expectation of getting paid back so there are no hurt feelings when the checks don't roll in.  But even then I'd think twice.  You're enabling irresponsibility by letting someone borrow or have money, plain and simple.  True example, a buddy of mine's father in-law borrowed $100,000 from my buddy's father.  He did this under the guise of saving his home and business.  Of course after he renewed his country club membership with a sizable chunk of the money it became quite obvious that he had no intention of handling the money as he had represented.

Let the banks be banks.  You be a friend or relative...and neither the two shall (or should) meet.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

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Credit 101 for College Students

August 10, 2010 By

Credit-card-student-advice Now that you're about to head off to college for the first time, or back again, it's important to keep in mind the role credit plays in your college years. And since "Credit 101" isn't likely a required course in your college curriculum, you could use a credit primer.

1. The kids starting this Fall will be the first vintage of college students who can't get a credit card on their own because of the CARD Act. They'll either need a job or a co-signer. Co-signing is a bad idea because of the permanent liability they'll have for the card usage. It's best to have a parent add a child as an authorized user on one of their cards if they need plastic on campus.

2. For upperclassmen headed back to school, it's time to start thinking about what it takes to get a job after graduation. Keep in mind that the job market is bad right now, so having good credit is important. WHY? Because employers can review credit reports as part of pre-employment screening. A new graduate doesn't want to lose out on a job because of something silly on their credit reports, like an unpaid utility bill or collections because of bad checks. It's also why #3 below is important to start thinking about...

3. Card options. College students have many options as to what type of card(s) they can use: debit/check cards, credit cards, charge cards, retail cards, and pre-paid cards. All of these serve that same function to a great extent (giving you the ability to buy stuff without cash). Keep in mind that only retail cards, charge cards and credit cards will show up on your credit reports. That means if you only use debit cards or prepaid cards you won't have a credit report when you graduate, which could make it more expensive when you do start applying for loans in your early 20s. Think about establishing credit while you're in school so you can get a leg up.

4. There's a penalty for messing up. If you do poorly on a test you can make up for it on the next test. Messing up with your credit means 7 years of punishment. Negative items like collections, missed payments on credit cards, and defaulted utility obligations will remain on your credit reports for 7 years -- long after you've graduated. Don't mess up!!

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

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Establishing Good Credit as a Young Adult: A How-To

July 22, 2010 By

Credit-building-advice I checked my credit report recently and it appears I was issued my very first card in 1999. I was a full 19 years old, a sophomore at Penn State and had no immediate need for the initial $4,000 credit limit. But as I recall, signing up for the Visa card on campus won me a lovely pair of Nittany Lion shot glasses – much cooler than the oversized tee-shirts another bank was offering down the street.

For better or for worse, those days are no longer. The Credit CARD Act of 2009 prohibits banks from giving away free merchandise to students on and around college campuses. And perhaps the biggest whammy to banks: they can no longer issue credit cards to those under the age of 21, unless the applicant has a qualified cosigner (usually a parent) or proof of sufficient income.

While these new rules are designed to help protect young adults, as with all well-intentioned Acts, there’s a downside, too; starting out will be harder because establishing a first credit line is now more difficult. Why? For one, according to FICO, 15% of your score is equal to the length of your credit history, so starting out early is important. Moreover, new cards will look at how well you do with old cards, and that goes to payment history and debt usage, which combined make up 65% of your score.

With the new age limitations, how can a responsible young adult circumvent the new rules and establish some credit history before age 21 in order to get into the rhythm of good financial behavior and add some length to their credit history? Here’s some advice:

Get a Job. The bill says a young adult’s application must indicate “an independent means of repaying any obligation arising from the proposed extension of credit in connection with the account." It’s no guarantee that having a job will qualify you, but it can certainly boost your chances.

Pay Down an Installment Loan. Unlike credit cards, an installment loan, like a student or car loan, is to be repaid in periodic installments. Paying these debts off on time is an additional way to boost your credit profile and score.

Get a Secured Card. A secured card offers an alternative way to establish credit history. An issuing bank (I recommend a credit union) offers you a credit line usually equal to a sum you deposit with the bank, starting at around $200-$300. Like a regular credit card, you’re responsible for paying back whatever you use (plus interest). Look for a card with low or no annual fees and make sure the issuer reports your activity to all three major credit-reporting agencies.

Join Mom & Dad’s Card. If your parents regularly pay off their bills on time, see if you can become an authorized user on their credit card account. The upside is that you can get credit for their timely and consistent payment activity. The downside is that if your mom or dad falls behind on payments or defaults, you’ll also look like a credit deadbeat.

Farnoosh Torabi – Credit.com Personal Finance Contributor, nationally recognized author, expert and television host. Her first book, You're So Money, is an acclaimed tell-all for young adults searching for financial independence. Her new book Psych Yourself Rich, gives readers the mindset and discipline to build their financial life.
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Why Good Credit Scores are Key to Surviving in a Troubled Economy

May 11, 2010 By
Credit.com and the free Credit Report Card were featured last night on Channel 2 KTVU's special report by Pam Cook.  The report discussed why preserving good credit scores is key to surviving in a troubled economy.



Adam Levin, Chairman and Co-Founder of Credit.com, was interviewed for the piece and explains how your credit card balances are one of the keys to obtaining high credit scores. What is your credit score, how is it calculated and what does it mean? If you missed it, you can watch the full clip here: http://www.ktvu.com/video/23512512/index.html

Special thanks to Erin Smith, a local consumer in the San Francisco area who shared her personal credit story.  The fact that she used our free Credit Report Card before she went to apply for an auto loan makes everything we do at Credit.com worthwhile. Credit.com, promoting financial literacy and consumer credit awareness, one consumer at a time. 

If you haven't tried the Credit Report Card, we encourage you to check it out:  https://www.credit.com/ufg/default/ccom_credit_report  Not only does it help you understand exactly how your credit scores are calculated and where you stand, it's really, truly, free.  And be sure to let us know what you think!

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