What it Means When Your Credit Can’t be Scored

Do one thing: For those without enough credit files to create a score, don’t worry. Read on for strategies to build a file that can likely move your credit score, and financial future, forward.  

Not Everyone Has a Credit Score

The product placements for new credit cards – and all they can pay for – are everywhere from the social media feeds on our smart phones to the ads that sometimes interrupt our favorite streaming programs. And while it may seem like everyone who wants a credit card or loan can get one, that’s not always the case. Right now, there are more than 30 million U.S. adults without a credit score, that’s nearly 13%, who lack access to credit. Here’s what that look likes:

• Nearly 10% of U.S. adults, some 25 million people, have been described as ‘unscorable’ for credit because they don’t have enough traditional credit files on record, according to data from the Federal Reserve. 

• Another 2.7% of adults, or about 7 million people, don’t have credit files at all, notes the Consumer Financial Protection Bureau (CFPB).

Insufficient Credit History

For a majority of U.S. adults with credit, the main credit monitoring tools will generate a credit score, which is the number between 300 and 850 that allows everyone from lenders to potential employers and landlords to help determine your creditworthiness. The higher the score, of course, the better your chances for receiving the most favorable terms on new and used car loans, mortgages, etc.

Common Causes for Being Unscorable 

Sometimes, though, a score simply can’t be generated for a couple of reasons. If you have applied for a credit card or a loan and were told you have insufficient credit history, or an “unscorable credit file,” here are some of the most common causes:

• Being brand new to credit. This is often the case with young adults just starting out on their own. 
• Having all of your accounts closed. This can refer to those who may have paid off high-interest credit cards and then closed all of those accounts, which isn’t always great for your credit score. 
• Having only old accounts with no recent activity. Some people prefer to use only cash or a debit card, which can sometimes lead to this type of credit scoring issue over time. 

“When there isn’t enough usable data to generate a score, your file can come back as unscorable rather than low,” says Alvin Carlos, CFA, CFP, a financial planner and managing partner at District Capital Management in Washington, D.C. “An unscorable file isn’t a bad score, it’s no score. And lenders treat that very differently.”

Why This Happens

The two main credit scoring systems in the U.S., FICO and VantageScore, have different requirements for what can generate a credit score. 

• FICO requires at least one account open for six months and one account updated in the last six months. When those conditions aren’t met, the file is deemed unscorable. 
• VantageScore credit scores can be generated if someone has one or more credit accounts open for at least a month and one account reported within the past two years, notes data from Experian, a credit reporting bureau.

How to Build Your Credit File Over Time

Apply for a Credit Card 

When searching for a first credit card, look for one specifically created for those with limited or no credit histories. That means looking for a card with:

• A low or no annual fee
• The lowest annual percentage rate (APR) possible.

Once approved, use the card sparingly, for only a few purchases a month, then pay it off in full every single billing period. Be sure to set up online bill pay to automate the transaction so you won’t pay late.

• Try not to spend more than 30% of the limit on the card. (If you have a $1,000 limit, don’t charge more than $300.)

Apply for a Secured Credit Card

If you are denied a traditional credit card, take heart. You can also apply for a secured credit card.

• While it looks and works much like a traditional card, it generally requires a security deposit as collateral. That means you are required to pay the credit card issuer a specified amount, such as $500.
• You can charge up to a certain amount each month — usually no more than the amount you paid to secure the card.
• Using and paying off a secured card regularly for 12 to 18 months should typically be enough time to help you transition into a regular unsecured credit card.

If you choose this option, make sure to select a secured card that reports to the three major credit bureaus, which are Equifax, TransUnion and Experian. You can do this by calling the credit card issuer and asking.

Become an Authorized User

A third option to build your credit file is to ask someone with good credit to add you as an authorized user to one of their credit cards. In some cases, a parent adds a child as an authorized user, which can help them build credit. (Note: Authorized Users are not recognized in FICO scoring models) This is how that interaction typically works: 

• Once you are added as an authorized user, you will get a card which should go on your credit file. 
• Just like with the secure card, it’s important to make sure the card issuer will report the new user to the three main reporting bureaus. 
• Because the charges will only come on one bill, the owner of the account is responsible for collecting the money from an authorized user and ensuring the payments are made on time.
• If payments are late, it negatively impacts the credit scores attached to the account.

With reporting by Casandra Andrews