For consumers with no record of credit accounts, there’s a Catch-22: They don’t have a FICO score because they don’t have a credit history – and they may have trouble building a credit history without a FICO score. Consumers who recently experienced bankruptcy or other damaging event could likewise find their lowered credit scores make it difficult to open new accounts in order to rebuild their credit history.
So, what should they do? If you’re new to credit, try asking a bank with which you have a checking or savings account for a credit card. Or try to open a retail or gas card, which often come with low credit limits, but are often easier to qualify for.
“If you already have a checking or savings account, your bank or credit union may be more likely than others to approve you for a card with a small credit limit,” Griffin said.
Another option is a secured credit card, which requires a deposit as collateral to secure the card’s line of credit. Secured cards, because they require you to deposit money, are easier to obtain than a regular unsecured credit card. Consumers need to check that the secured card’s issuer reports account activity to the three major credit bureaus (Experian, Equifax and TransUnion) that maintain credit reports.
“Using a secured card is a low-risk way to build credit,” said Heather Battison, vice president at TransUnion. “With a secured card, consumers can use credit for small purchases like groceries, pay the balance in full each month and establish a history of responsible borrowing.”
Some secured cards enable the borrower to upgrade to a standard unsecured account after a set length of time (such as 12 to 18 months) of responsible borrowing, so compare features on your secured card to see if that’s a possibility.
You can also ask a family member or close friend who has a credit card to add you as an authorized user on his account. As an authorized user, the account’s history will be added to your credit report. Just be sure your friend or relative’s account is in good standing, with no missed payments and a low balance relative to its credit limit.
To close or not to close?
Borrowers who already have loans, meanwhile, should take their length of credit history into account before closing an existing credit account. That’s because, as discussed earlier, closed accounts will eventually fall off their credit reports.
Once those accounts are removed from your credit reports, they will no longer be included in the calculation of your FICO score, since the score is calculated as a snapshot of your reports at a specific time. That means that closing an account can dramatically shorten your credit history, depending on how long you’ve had your individual cards and if you don’t take out any new credit cards or loans in the near term.
While it’s true that keeping your card accounts open can help your score, there are cases in which canceling a card is the better option. If the card tempts you to overspend or it has a high annual fee you can no longer afford, considering canceling it, even if you stand to lose a few credit score points. After all, missing a payment or maxing out a card will cause more damage than shortening your credit history.
Closing an account can have a more immediate impact on your utilization ratio – the amount you owe compared to your credit limit – which could also hurt your FICO score.
For instance, if you have one card with a $10,000 credit limit and a zero balance, and another card with a $5,000 limit and a $4,000 balance, your overall utilization ratio is 27 percent. But if you close the $10,000 limit card — perhaps because it’s not being used – your credit utilization rate jumps to 80 percent. Such a dramatic change in your debt-to-limit ratio would almost certainly hurt your score.
If you do keep all of your accounts open, be sure to pay them on time and keep your balances as low as possible. Your credit will grow old gracefully, and your score will stand the test of time. Now that you are up to speed on credit history, here is a great place to start researching for a credit card.