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Expert Q&A: The Lack of Credit History Catch-22

Erica Sandberg

August 22, 2011

QHi Erica,
What is up with this horrible catch-22? Credit inquiries (applications) negatively impact your credit score, but you HAVE to apply to GET any credit. It’s such a stupid rule. I am trying to raise my credit, and so I went to open some new accounts since I only have one credit account. Three of my applications were rejected for “lack of credit history” so now I have those inquiries bringing my score down which will make it even harder to get new lines of credit. What the h*** am I supposed to do now? — Jay

ADear Jay,
While it may seem that there is no rhyme or reason to the credit approval process, there is actually a lot of sense behind it. Still, I get why you’re mad and baffled. It’s confusing, and myths abound. So here is what you need to know about credit scores and qualification.

The truth is that inquiries are a very small part of a FICO score. Picture a pie, divided into segments. The largest slices are payment history (35 percent) and outstanding debt (30 percent). Add those two together and more than half the pie is eaten up. Now draw in a healthy slice for length of credit history, at 15 percent. That leaves only two more categories: types of credit in use and inquiries. Each of these is only 10 percent. Minuscule, really. Ask Erica

When you look at the scoring system this way, you can plainly see that those applications you sent in probably didn’t do as much damage as you think. That should help you relax a bit.

Now, the lack of credit history is a concern, especially because the creditors you’ve pursued have said so. That just means they want to see more from you. They’d like to know how you’ve borrowed and repaid money over a long period of time. You don’t say how many months or years you’ve had that one credit card, so I’m guessing it’s either pretty fresh or you’ve barely used it. So dust it off and start charging. Carefully.

Your first step is to determine how much you can afford to spend without going into debt. Write up a budget and figure out what types of expenses you’d like to charge, while still being able to pay the bill in full and on time when it comes in. This way, you’ll establish a terrific payment pattern, which will satisfy the weightiest FICO score factor, and keep the balance to nil, which will appease the next most important factor (and keep you out of expensive debt). Follow this simple strategy for at least a year and your score will surely rise.

If you want another card after that — such as one that has a lovely rewards program attached to it — read over the qualifying terms first and then apply to the one that fits your profile. This means that you should also check your credit reports and scores to know how you’re doing.

In fact, it’s important to pull your reports once a year, because errors do happen, and you don’t want them to be the cause of a loan or line of credit rejection. Access them from annualcreditreport.com, since they’ll be free that way. You can get on MyFico.com, but you’ll have to pay a nominal fee for them. They range from a low of 300 to a high of 850, but one in the mid-700s is considered excellent.

See? The system isn’t actually so crazy or hard. Creditors just want to know what kind of customer you will likely be before lending you any money. I think that’s pretty rational.