Understanding Insufficient Debt History: How to Build Credit

Having no credit history can be worse than having less than perfect credit, because the lender has no way to judge your credit history. If a creditor ever rejects one of your applications for insufficient debt experience, you need to start using debt more often. You also need to use several kinds of debt. The more experience you can show handling debt responsibility, the more likely it is you can get a loan at the lender's lowest rate.

Identification

Insufficient debt experience means you do not have enough credit history for the credit bureaus to give you a credit rating. Even if you have a credit rating, the lender may not feel you have enough experience handling debt. For example, if you only have a credit card with a $500 limit on your record, the lender may not feel comfortable approving you for a several hundred thousand dollar mortgage. Alternatively, you may not have enough experience handling a mix of credit, such as installment loans and revolving lines of credit.

Time Frame

If you have several credit accounts, it takes about four to six months for the credit reporting bureaus to report enough history on an account to establish a credit rating. Also, the lenders might not report to credit bureaus or forget to do so. Thus, you should ask your lender to report accounts to the bureaus or if your lender does not report accounts, switch to a lender that does report to the bureaus.

Solution

In order to gain credit, you need to use credit. If you have no credit history, apply for a credit card and installment loan. Ideally, you should have two credit cards or revolving accounts--an account in which you can defer the balance and you regain the limit on the account once you pay the balance--and one installment loan. You probably have to start with the lowest tier of credit cards, such as a department store card or credit card backed by a security deposit. Avoid applying for too many accounts, because more than six inquiries into your credit history is a significant derogatory item.

Warning

Watch out for credit card scams. Nefarious companies may try to sell you a secured credit card with a high annual feel and not report the account to the credit bureaus. The account may have an extremely high interest and require you call a "1-(900)" that charges up to $50 to your phone bill. Also, a scam company may claim to guarantee approval when approval is never guaranteed in the lending industry until the lender reviews your credit history.