Editorial Policy

Credit-free consumers may end up 'unscorable'

Allie Johnson

October 2, 2013

You don't want a bad credit score, but what about no score at all? Consumers without a score — sometimes referred to as “unscorables” —  can also run into trouble when they try to get credit.

“Not having a score means it's going to be difficult or even impossible to get a loan for a car or a house,” says Anthony Sprauve, spokesman for MyFICO. “And it could make it hard to get credit card.”

You might even have trouble renting an apartment or getting a job, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, as some landlords and employers pull the credit reports of potential tenants and hires.

Who are the unscorables?

The unscorables come from a variety of life circumstances, experts say. Their ranks might include:

  • A young consumer who's never had a credit card or other line of credit (such as a loan). Everyone has to begin building a credit history at some point, and before that happens, you won't have a credit score, Jones says.
  • A recent immigrant. If a newcomer doesn't have a credit history in the United States, “they would be starting out fresh like a new college graduate,” Sprauve says.
  • A consumer who has sworn off credit. Some personal finance gurus advocate ditching credit in favor of cash. The upside is that you can't get in trouble with credit card debt. But a major downside is that you won't have a credit score, Jones says.
  • A senior citizen who at one time had a good credit score but has become very financially secure and hasn't used credit in a while. Consumers in this situation might have paid off a mortgage and bought cars with cash, experts say.

Whether someone is unscorable varies based on the scoring model used by a lender — but 90 percent of lenders use FICO scores, Sprauve says.

In order to have a FICO score, the consumer must also have had some type of credit account — for example, a credit card, car loan or mortgage – that is at least half a year old and has been reported to credit bureaus by the lender in the past six months, Sprauve says. In other words, if you have no active credit accounts (or only inactive ones), FICO won't be able to get a read on you.

Other scoring models, such as the new VantageScore 3.0 model, have different parameters. According to VantageScore Solutions, this model provides a score for as many as 35 million consumers who wouldn't have a score though traditional scoring. The model uses rent and utility data when it's reported to the bureaus, and a score is generated one month after an account has been reported to one of the major bureaus and for two years or more after the most recent activity on an account.

The president and CEO of VantageScore Solutions, Barrett Burns, wrote in a blog post for the National Association of Federal Credit Unions that many consumers who are traditionally considered unscorable are “actually quite creditworthy.”

Yet that doesn't mean much if the lender you're using doesn't take the VantageScore 3.0 into account.

Unscorable? What next?

About one-third of lenders get applications from consumers without credit scores, according to a July 2013 report by VantageScore Solutions. Many of these consumers — just over 40 percent — own homes and many are employed. About 30 percent hold professional jobs, while 31 percent hold skilled labor jobs and another 31 percent are retired, according to the VantageScore Solutions report.

If you apply for credit without a score, the lender might consider other factors when making a decision. For example, according to the VantageScore Solutions report, more than 50 percent of lenders consider it completely acceptable to use pay stubs to verify creditworthiness. Almost 35 percent say the same about rent and utility payment history, and more than 20 percent about old credit file information.

The report states that lenders find younger consumers and others with “thin credit files” to be more challenging to evaluate. But, if you have “fallen off the credit score radar because you stopped using credit,” it might be easier for a lender to gauge how risky it would be to give you a loan, Sprauve says. Accounts remain on your credit reports for seven years (if the account was delinquent) or 10 years (if it was paid as promised), so lenders need only look to the past to see if you've handled credit responsibly.

However, if you want to get or reestablish a FICO score before you apply for credit (a good idea, considering the weight FICO carries), it will take you at least six months. Here is what you can do:

1. Build your credit history from scratch: If you have no credit history, it's important to start building one. If you already have a checking or savings account with a bank or credit union, that might be a place to start. Most lenders have specific programs to help consumers establish credit, Sprauve says. Once you open a credit card or take out a loan and the account stays active for six months, a FICO score will be generated for you.

2. Revive your score: If you already have a credit history and had a FICO score at one time, you also will need to get credit of some kind to reactivate your credit history and FICO score. That could be as simple as opening a credit card (or using an old one you haven't used in a while) and making small purchases and payments regularly.

“You don't need to go out and open a bunch of credit cards,” Sprauve says. “You can have one credit card you use once a month to pay the phone bill, pay it off every month, and that will be enough to generate a score.”

For consumers who have trouble getting a credit card, the AICCCA does not recommend retail credit cards because they have very high interest rates and severe penalties. Yet they can be fairly easy to get.

“It's a viable option,” Jones says.

Another option is a secured credit card. Designed for those with poor or thin credit histories, secured cards require a security deposit in exchange for a credit line.

3. Use your credit responsibly: If you're going to make an effort to get a FICO score, you want to make sure it's a good one. First, it's crucial that you pay all of your bills on time, every month — because payment history accounts for 35 percent of the FICO score, Sprauve says. Also, keep your credit card balances low so they don't take up too much of your available credit. Sprauve recommends staying under 20 percent, so if you have a $1,000 credit limit, try to keep your balance under $200. This credit utilization ratio counts for 30 percent of your score.

Even if you're eager to move out of unscorable territory, Sprauve says it's important to resist temptation to apply for credit without thinking it through first – such as on a whim in a retail store.