What To Do If You Don’t Have A Credit Score

What To Do If You Don't Have A Credit Score
What To Do If You Don’t Have A Credit Score
It’s estimated that about 50 million American adults don’t have a credit score.

That’s right — not good credit, OK credit or poor credit. We’re talking no credit. And that can be a huge problem if you’re unable to pay for something like a car or a home with cash and need to take out a loan to finance it. No credit score means no loan.

There are a few reasons why you might not have any sort of credit history. Perhaps you’ve gotten into the habit of paying for everything with cash? Or maybe you’ve established lines of credit, but haven’t used them within the past two years? If you’re new to America, it’s possible that you haven’t established it yet. Whatever the reason, we’d strongly suggest you start establishing some credit roots immediately, as that three-digit number holds so much weight when it comes to your financial future. This post will take a closer look at what to do if you don’t currently have a credit score. Here’s a look:

Don’t Have a Credit Score? Do This!

No credit score? Here are some considerations for how to establish credit:

  • Get a secured credit card: Think of these as credit cards for beginners. They work just like a credit card does, except you need to have a cash deposit to back up any usage. Usually, this cash deposit you put forward is the same amount as your credit limit. Secured cards work just as how regular credit cards do for the most part. You can charge purchases and you’ll have a payment date to abide by. Any balance not paid in full is subject to interest. After you’ve dipped your feet in the water with a secured card, it’s usually pretty easy to take the next step to an unsecured one.
  • Get a retail credit card: Yes, you can get some nice perks based on the store that offers it, but the real incentive is that these are usually easier cards to get approved for — even if your credit is lacking.
  • Find a co-signer: If you don’t want to go the secured card route, consider asking a friend or family member if they’ll co-sign with you on a credit card.
  • Ask to be an authorized user on a family member’s card: Don’t want to go the co-signer route? See if someone will add you as a user on their existing credit card. This can be a great way to build credit based on that card’s total usage, whether it’s you doing the spending or not.
  • Can your rent payments help you? Many landlords use rent-reporting services, which can help their tenants build credit, especially when it comes to making on-time payments. Not every scoring formula will take this into consideration, but many do.

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How to Build Your Credit Score Back Up After Foreclosure or Short Sale?

How to Build Your Credit Score Back Up After Foreclosure or Short Sale?

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Credit Score, Foreclosure, Short Sale. Credit Score after Foreclosure or Short Sale. So you’ve foreclosed on a home or had to sell for less than what you owed on the home? You probably think you’re doomed as a consumer moving forward. And while a short sale or foreclosure is never something that you want to have on your credit report, neither is a be-all, end-all when it comes to purchasing power. However, it should go without saying that either a foreclosure or short sale will require consumers to enact some credit repair.

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How to Build Your Credit Score After Foreclosure or Short Sale

Credit Score after foreclosure. Just how to you go about rebuilding credit after a short sale or foreclosure? Here’s a closer look:

Rebuilding Credit After Foreclosure/Short Sale

The first thing that you should do after a foreclosure or short sale is put it in the past. Yes, it happened. Yes, it’s unfortunate. Yes, it’s not going to look great on your credit report and it’s going to hurt your credit score. But like we said in the opening, it’s not a be-all, end-all. So put it in the past. It’s over with. While the short sale or foreclosure will stay on your credit report as a negative part of your history, that doesn’t mean that you can’t build positive activity beyond that. The goal for a consumer following a short sale or foreclosure is to build positive activity to make the negative on the credit report look like nothing more than a blip on the radar. Here’s how to do it:

  • Immediately work to start (or continue) at least three positive lines of credit: Whether it’s a secure credit card, personal loan or some other type of account, these lines of credit are all ideal opportunities to build positive activity. Since the FICO score weighs consumer behavior on making on time payments, credit history and credit utilization, you can put the negative of a foreclosure or short sale in the past by building positive activity with at least three accounts. Perhaps you have a healthy account or two opened? Great! Keep up the good work with it.
  • How to build positive credit: Like we hinted at in the last bullet point, the best way to build positive credit is to make on-time payments and keep balances low.

If you follow the two steps above following a foreclosure or short sale, it’s not uncommon to see a significant improvement in your credit score within as little as six months. In fact, it’s not out of the realm of possibility for those with credit scores in the low 500s to see their scores increase into the high 600s or even the 700s after a foreclosure or short sale by building positive activity. Just remember, it’s not a quick fix – it take a little bit of time.

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Fannie Mae Deepens Credit History Checking

Like most Americans, you’ve accrued some credit card debt. You’re paying it off, but mostly sticking to just making the minimum payments so that you’re able to meet your other financial obligations. No big deal, right? Sure, you’ll pay more in the long haul because of interest, but credit card companies set minimum payments for a reason and you’re still making your monthly payments on time. Noting all of this, and considering that your credit score and credit history is in pretty good shape, you figure now is the time to apply for that home loan.

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Surely you’ll be approved on your credit history and creditscore , right?

Not so fast.

Fannie Mae, the entity responsible for the issuing of government mortgage loans, is digging deeper into the credit history of applicants beyond just their credit history and credit score. That’s right, Fannie Mae is now taking into consideration how applicants are managing their debt as it pertains to approving or denying mortgage loans.

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Fannie Mae’s trended credit history check

The latest version of Fannie Mae’s underwriter software is designed to more carefully analyze what it refers to as “trended credit data,” or details about how consumers are specifically managing their debt. Instead of just analyzing whether or not consumers are making their payments on time, the new software version also takes into consideration the following:

  • How much consumers are paying monthly toward balances.
  • The frequency that they are making their payments.
  • Their ability to properly manage debt overall.

For instance, consumers just making the minimum payments on their credit cards aren’t going to be seen as favorably as consumers making more significant payments toward debts or consumers that pay off credit cards each month. This new judging system, in turn, could prevent mortgage applicants from being able to buy a home. Arguably most alarming about these new standards is that Fannie Mae offers government-backed home loans to help make housing more affordable for low- to middle-income Americans. Chances are it’s these low- to middle-income Americans that have these types of debt repayment practices.

This is still in the early phases of rollout and unlikely to take effect immediately. However, Fannie Mae’s new standards may become routine before too long. It could even snowball so that other lenders judge consumers similarly, which could really make things difficult for Americans.

Navigating Fannie Mae

So how can you work around Fannie Mae’s more in-depth consumer considerations if you don’t qualify for a conventional mortgage? It’s all about enacting a viable credit repair plan. To show that even if you have a balance, you’re doing your best to eliminate it from your credit history check and credit score. Here’s a look at some tips for how to eliminate debt and improve your consumer status:

  • Pay off high interest cards first.
  • Contact lenders to see if they’ll give you a lower interest rate.
  • Consider debt consolidation so that you’re only paying off one balance as opposed to several balances.
  • Only spend what you know you can immediately pay off to avoid accruing more debt.
  • Stay disciplined.
  • Come up with a plan: In addition to a base budget, consider putting any additional income (i.e. performance bonuses, tax refunds, cash back rewards, etc.) toward debt repayment.

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All credit cards have some sort of a credit limit, which is the maximum amount that you can charge to the respective account before any charges are void. However, this credit limit isn’t information that consumers are typically privy to – unless they apply for the card, that is. That’s largely because before a creditor can issue any sort of a limit, it has to know your credit score as well as other crucial information, like how much money you make, your monthly debt obligations, credit report history and more.

The Rule of Thumb

Just because you won’t get the specifics of your credit limit until you’ve gone through the application process – and become approved – doesn’t mean that you can’t have a general idea of what it’s likely to be. Generally speaking, your credit limit is about double your monthly income, minus any debt obligations you have. So, for instance, if you make $5,000 a month and have debt obligations of $2,000 per month, your credit limit is likely to be in the $6,000 range. While this is the general rule of thumb, the key word is “general,” as there’s no true universal method and each creditor typically uses their own respective formulas.

Anatomy of the Credit Limit

There’s typically a lot that goes into the credit limit that creditors issue when you apply for a credit card. Here’s a brief overview of what helps make up this limit, aside from your monthly income and debts owed:

  • Credit score: The better your credit score, the less interest you’re likely to pay on purchases. You’re also more likely to have a higher credit limit, as a good credit score shows that you’re a reliable, responsible consumer that can adequately repay any credit card debt. Data shows, for example, that consumers with a FICO score of 720 or greater had an average credit limit of at least $8,000. Conversely, those with FICO scores at or below 620 had a significantly lower limit at an average of $700. So if you want a high limit and your credit score is sub-par, we’d recommend enacting some credit repair best practices prior to applying.
  • Payability: Credit limit is also largely contingent on a consumer’s ability to pay. Noting this, things like debt-to-income ratio, debt-to-asset ratio and consumer income after any debt is paid are all major factors that play into credit card limit.
  • Risk: This factor isn’t so much pertaining to your potential risk as a consumer, but any economic risk based on what’s going on in the world. For instance, during the Great Recession, credit cards were issued with much lower limits than what was issued before and after the economic downturn. Creditors often don’t want to chance a situation where you’ll max out your limit and be unable to repay debt.

It’s also important to note that the credit limit you initially receive should be thought of as more of a starting point. If a creditor sees that you’ve been responsible with your card, you’ll often see your limit increase over time. If the creditor doesn’t do this for you, you can even put in a limit increase request.

The better your credit score, the better your mortgage rates.

While this rule of thumb is fairly common knowledge, most people are unaware of just how much savings homeowners can experience over the term of a 15- or 30-year fixed-rate mortgage with even the most seemingly marginal difference in interest rate. For example, a mortgage rate of 3.75 percent, compared to a lower 3.5 percent rate, would likely cost a homeowner over $40 more a month – or about $500 more per year. If you multiply $500 by 30, that hypothetical consumer is paying about $15,000 more over the course of a 30-year mortgage than a consumer whose rate is only 0.25 percent less. That’s how big the difference can be between an excellent credit score and just a good credit score.

Yes, your credit score can wind up costing you – or saving you – a lot of long-term money when it comes to your mortgage.

Why Your Credit Score is Key

Would you want to lend money to a friend or family member who has a history of never paying people back? Lenders are in the same boat – and that’s why so much weight is put on your credit score during the mortgage loans application process. A good credit score tells lenders that you’re a responsible, reliable consumer with a track record of making on-time payments. A poor credit score can signify the opposite.

When there’s less risk with a consumer, lenders are more apt to do business with them and approve a loan with a low rate. However, when there’s more perceived risk, lenders throw in the caveat of a higher rate if the particular consumer is even approved for a loan in the first place.

What Are the Best Scores for Conventional Mortgages?

The higher the score, the lower your rate. That said, a FICO score of 720 usually puts consumers in excellent standing where they’re able to qualify for the lowest rates. Between 700-720 is considered good standing, where rates are still favorable, but not as low, and 680 is in the average range where rates are likely to be higher. Anything below 680 and you may be hard-pressed to get approved for a conventional mortgage.

If your score is short of the excellent mark, we’d recommend that you do some credit repair in order to get your score up where you can qualify for a lower rate. Though you may be chomping at the bit to buy a home now, the long-term savings of potentially tens of thousands of dollars can’t be dismissed. Here’s how to improve your credit score:

  • Improve your debt-to-credit ratio: Keep your credit card debt within 30 percent of your total credit limit. Anything higher and your score can take a hit.
  • Make all payments on time.
  • Pull your credit report and analyze it carefully for errors. It’s estimated that over 20 percent of all credit reports have some sort of error. Dispute any that are on your report.
  • Pay off high-interest credit cards before low-interest ones.

There are three big complaints about the current credit scoring system in the United States – it’s confusing, it’s not always fair and it’s not always as accurate as it pretends to be. And considering that about one-third of all Americans have either poor or bad credit, it’s probably a good bet that a significant number of these individuals are “victims of the system” to some extent. In other words, their credit situation isn’t quite as dire as their FICO score indicates.

But soon this may be changing, thanks to a bill introduced in May by Rep. Maxine Waters dubbed the “Comprehensive Consumer Credit Reporting Reform Act of 2016.” The proposed bill could help a number of Americans improve their credit scores – and they wouldn’t even have to do anything:

What the Proposed Bill Includes

  • Bad credit information (i.e. foreclosures, Chapter 13 bankruptcy) would be removed from credit reports after 4 years (not 7 as it currently stands).
  • Debts that have been paid and settled would be removed 45 days after the date of finalization.
  • Employers would be forbidden to check a would-be employee’s credit report for employment consideration purposes.
  • Disputes wouldn’t be handled so much by the consumer, but by the credit bureaus.
  • Credit reports and credit checks would be able to be accessed complimentary more regularly so individuals could monitor improvements. Presently, consumers are allowed one free credit report check a year.
  • Credit relief would be provided to those that have been victimized by predatory lending.
  • The Consumer Financial Protection Bureau would be in charge of monitoring and developing scoring algorithms and models.

Will it Pass?

While the proposed Comprehensive Consumer Credit Reporting Reform Act of 2016 appears favorable (and practical?), it’s also another pitch in a line of credit reform proposals that have been introduced over the years. And these proposals have done little in the way of moving the legislative needle when it comes to credit scoring.

In fact, this is the second recent credit reform pitch from Waters herself, as her first attempt came in 2014. Last year, Sen. Elizabeth Warren and Rep. Steve Cohen introduced a proposal that would prohibit employers from checking credit scores and reports on job applicants. Both proposals didn’t pass. In fact, the last real notable change in credit reporting may have been way back in 2003 when an amendment to the Fair Credit Reporting Act permitted consumers to receive complimentary annual credit reports. Based on this unfavorable track record, the Waters’ latest proposal may appear to be a long shot, but the Senator is still working to help raise support for it.

Stay tuned to see where – if anywhere – this bill goes, as it could spell some welcome relief for millions of Americans with less than favorable credit scores.

If you default on a loan and fail to pay or work out some sort of arrangement with the creditor within three to six months, things have the potential to get really sticky. You may be hounded day and night by the creditor seeking information on the status of the payment you owe to the point where their tactics may be considered illegal. Your creditor may also sue you and take you to court for the money that you owe – and that’s where things have the potential to get even more tumultuous. According to a May report from Prorepublica via Boing Boing, debt collectors often prey on minority and underprivileged groups, filing lawsuits in states with low filing fees in an effort to recoup as much as possible from the people that owe. It’s further proof that the debt-collection machine is ruthless, and this post is designed to take a closer look at just how brutal it really is.

Inside America’s Debt-Collection Machine

So just how appalling is the debt collection process in America? Just take a look at these takeaways from the Prorepublica piece:

  • In 2008, the state of New Jersey heard about 140,000 debt collection cases. Almost all of these cases were filed against African Americans that were unable to afford legal representation. These 140,000 cases were up exponentially from 12 years prior, when only about 500 cases were heard.
  • Most of the debt collection cases were filed by what’s known as “vulture capitalists,” or those who purchase the debt on the cheap and quickly file a lawsuit in a predatory manner against those they know are the easiest victims.
  • Medical debts are among those that are most sought after – and some of the victims that debt collectors and their lawyers have gone after for payment include active-duty soldiers.
  • Capital One was discovered to be the leading U.S. bank when it comes to filing lawsuits against its own customers.
  • The debt collection process for many lenders is highly predatory. It not only involves purchasing debt on the cheap, but filing suit in the states were it’s most affordable to do so to keep their own costs down. It’s a low-risk, high-reward type of proposition.
  • Creditors are always represented by legal teams in court. In 2013 New Jersey, a whooping 97 percent of defendants were without legal counsel.
  • When collectors are given access to and permitted to tap into a consumer’s bank account to seek repayment, the average amount that they net is a measly $350.

Not only does Prorepublica shed light on a damaged debt collection system in need of reform, but it also serves as a good reminder on why you should do your best to avoid financial issues at all costs. Not only can such issues hurt your credit score, but you may also find yourself on the wrong side of the predatory ladder.

Credit Scores – More Important than Ever in 2016

If you’re reading this, we hope that you already know just how important your credit score is. To review, your score is somewhat of your financial lifeblood, and those three little digits can tell lenders if you’re an at-risk borrower, whether or not you should even qualify for a loan and what interest rate you should pay on said loan (should you qualify for one). Generally speaking, the better your credit score, the lower the interest rate – and vice versa. So, yes it is important – and in 2016, it’s arguably going to be more important than ever. Why? Because the Federal Reserve Board elected to raise the benchmark federal funds rate. We explain:

About the Benchmark Federal Funds Rate

You’re probably wondering just what impact the raising of the benchmark federal funds rate has on the value of your credit score. Consider this: the aforementioned rate, essentially, is the determining factor in how high of an interest rate banks and financial entities have to pay to borrow from each other. When the benchmark federal funds rate increases, so does the minimum interest rate, or prime rate, that lenders will charge even their most exceptional customers.

What the Rate Increase Means

Since the prime rate is likely to go up, so will interest rates in general, even if your credit is exceptional. This means that new loans are likely to be more expensive, as will any existing loans with variable rate financing. Those who will be particularly hard hit are individuals with bad credit, as loans and credit cards may become more difficult to attain (not to mention the likelihood of even higher interest rates for at-risk borrowers). The Federal Reserve Board has elected to raise the benchmark federal funds – and the board is likely to approve further increases in the future, hence why your rating and score is so important as we begin 2016. So if it is less than stellar, start making efforts now to improve it. Some common credit repair practices include committing to paying bills on time, lowering your debt-to-credit ratio and, perhaps easiest of all, checking your credit report at least once a year to ensure its accuracy related to your consumer behavior. With the funds increase, interest rates are likely to increase across the board, for those with both good and poor credit. Make the commitment now to elevate your score so that you can ensure you’re paying the least amount possible on any loans or credit cards.