Insufficient credit history means there isn’t enough information in your credit report for lenders, landlords, or other entities to evaluate your creditworthiness, often resulting in declined credit or loan applications. For instance, a Reddit user expressed frustration after being denied an Apple Card due to “insufficient credit history,” despite responsibly managing two Amex credit cards with a combined limit of $15,000 and an HSBC card with a $5,000 limit.
In this article, we’ll explain what insufficient credit history means and provide practical steps to fix it. By understanding how to build and improve your credit history, you can increase your chances of getting approved for the loans and credit cards you need.
What Does Insufficient Credit History Mean?
Insufficient credit history means there isn’t enough information in your credit report for lenders to assess your creditworthiness. It’s not necessarily a bad thing; essentially, it means you haven’t used credit long enough or in a substantial enough way to generate a reliable credit score. Here’s a breakdown of how your credit score is calculated and why credit history matters:
- Payment history (35%): This is the most significant factor, and without a credit history, there’s no payment record to assess.
- Amounts owed (30%): This looks at your credit utilization rate, which is how much of your available credit you’re using. With no credit accounts, this factor can’t be calculated, leaving a gap in your credit profile.
- Length of credit history (15%): The longer your credit accounts have been open, the better. Without any history, this metric is non-existent.
- Credit mix (10%): This considers the variety of credit accounts you have, such as credit cards, installment loans, and mortgages. A lack of credit history means you likely have no mix.
- New credit (10%): Opening several new accounts in a short period can be risky. With no history, there’s no record of your recent credit behavior.
Your credit history plays a crucial role in your overall financial health. A proactive approach to strengthening your credit profile is to consistently use regular bill payments to improve your credit standing. Cushion simplifies this process by automatically tracking your purchases and payments, reporting them to credit bureaus, and helping you build a stronger credit history with ease.
Insufficient credit vs. bad credit
While both insufficient and bad credit can make it difficult to obtain new credit, they are not the same. Insufficient credit means you have little to no credit history, whereas bad credit indicates you have a history of poor credit management from late payments, high debt levels, or defaults.
In terms of scoring, a bad credit is having a credit score below 580. Meanwhile, insufficient credit means you technically don’t have a credit score yet. Interestingly, having insufficient credit can sometimes be seen as less risky than having bad credit because there are no negative behaviors recorded, just a lack of data.
How Insufficient Credit History Affects You
Because your credit history makes up a huge part of your score, insufficient data leads to a low or nonexistent score. Here are some financial implications you might face with a limited credit history:
Challenges in getting approved for a loan
Lenders rely on your credit history to decide whether to approve your loan application. With insufficient credit history, you may struggle to get approved for personal loans, auto loans, or mortgages.
Pro Tip: If you want to get a loan despite having insufficient credit history, you have a couple of options. One approach is to become an authorized user on someone else’s credit card, allowing you to benefit from their established credit history. Another option is to apply for a secured credit card, which requires a cash deposit as collateral. This deposit sets your credit limit and reduces the lender’s risk, making it easier for you to get approved.
Higher interest rates
If you do get approved, the terms may not be favorable. Lenders may charge higher interest rates to offset the perceived risk due to your lack of credit history. For example, a higher interest rate on a mortgage could mean paying thousands of dollars more over the life of the loan.
Limited credit card options
Without a solid credit history, it can be hard to qualify for credit cards. You might only be eligible for secured credit cards, which require a cash deposit as collateral, or cards with higher fees and interest rates.
Here are some examples of secured credit cards for those with insufficient credit history, along with their respective required security deposits:
|
Secured Credit Card |
Security Deposit Amount |
|
|
$49, $99 or $200 |
|
|
$200 |
|
|
$200 |
Difficulty in renting
Many landlords check credit reports to evaluate potential tenants. Insufficient credit history could make it harder to rent housing, as landlords prefer tenants with a track record of managing finances well. Some might even ask for a larger security deposit as a precaution.
Required deposits from service providers
Some utility companies and service providers check credit histories before opening accounts. If you have insufficient credit, you might be required to pay a deposit to get services like electricity, gas, or a mobile phone plan.
Understanding these factors can help you see why building a good credit history is important and how it can affect various aspects of your financial life.
How to Fix Insufficient Credit History
To have a sufficient credit history that can generate a score, you need at least three to six months of credit activity reported to the credit bureaus. But it’s not just about the length of time—it’s also important to build a strong and positive credit history. This might sound a bit complicated, but don’t worry. With these simple steps, you can create a good credit history that’s both sufficient and strong:
1. Become an authorized user on someone else’s card.
One way to start building credit is to become an authorized user on someone else’s credit card account. This allows you to piggyback on their credit history, benefiting from their responsible credit use without the risk of carrying the debt. Ensure the primary cardholder maintains a good payment history, as this will reflect on your credit report as well.
2. Apply for a secured credit card.
Secured credit cards are designed for people with little or no credit history. You provide a cash deposit that serves as your credit limit. Using this card responsibly by making on-time payments and keeping your balance low can help you build credit. Over time, you may qualify for an unsecured card if you demonstrate good credit behavior.
3. Use a credit builder loan.
Credit builder loans are small loans where the money you borrow is held in a savings account until you’ve repaid the loan. This ensures that you make regular payments, which are reported to the credit bureaus, helping to build your credit history. It’s a safe way to demonstrate your ability to manage debt responsibly.
4. Report your rent and utility payments.
Some services allow you to report your rent and utility payments to the credit bureaus. While not all credit scoring models take these payments into account, they can still contribute positively to your credit history. One such service is Cushion. It is an app that automatically reports all successful bill payments monthly to Experian, allowing you to easily build a positive credit history using the payments you’re already making.
5. Make small, manageable purchases.
If you have existing credit accounts, make small purchases that you can easily pay off each month. This shows the credit bureaus that you can manage credit responsibly. For example, you could use your credit card for groceries or gas and pay the balance in full each month.
6. Pay bills on time.
Timely payments are crucial for building a strong credit history. Set up bill reminders or automatic payments to ensure you never miss a due date. Consistently paying at least the minimum amount due on time will help build a positive payment history, the most significant factor in your credit score.
Related article: 5 Ways to Kick Inactivity Fees to the Curb
Summary
Building a sufficient credit history takes time and discipline, but it’s an essential step toward financial health. By understanding what insufficient credit history means and following the steps to improve it, you can enhance your creditworthiness and open doors to better financial opportunities in the future. Remember, everyone starts somewhere, and with consistent effort, you can build a strong credit profile.
