By John Ulzheimer
A credit score is one important consideration—along with income level, down payment, employment confirmation, and other factors—for lenders assessing the risk of doing business with consumers, and under what terms. Consumers are better off having a score than not having a score, because it provides them access to mainstream credit. That means we’re all better off having a credit file capable of being scored rather than a credit file that doesn’t meet minimum credit scoring criteria.
One of the key, consumer-friendly, differentiators of the VantageScore 3.0 model is the inclusive way it can score more people. The model can score 30-35 million more consumers than traditional credit scoring models. But even the VantageScore model needs a minimum amount of information to generate a credit score, and there are some consumers who simply do not have a credit file at all, or enough information on their credit files to generate a credit score under any model.
So how do consumers get around this roadblock to easier underwriting?
There are three effective and safe methods that consumers can use in order establish credit and thus become scoreable:
Open a secured credit card. A secured credit card is a real credit card issued by a mainstream bank, credit union or credit card issuer. Consumers have to apply for the account, and it has a due date, interest rate and a credit limit, similar to traditional credit cards.
The primary difference is the issuer is going to require that the consumer make a deposit as security for the extension of credit. And in most cases the credit limit on the card is going to equal the deposit amount. So if the deposit is $500, then the limit is likely to be $500.
Because it’s a true extension of credit, the issuer can report the account and its activity to the credit reporting agencies. To maximize impact on
scoreability, consumers should make sure the card issuer reports their secured card accounts to all three national credit reporting companies (CRCs): Equifax, Experian and TransUnion.
Take out a credit builder loan. Credit builder loans are normally issued by credit unions, which means the consumer will likely need to have a relationship with a credit union to take advantage of this option.
With a credit builder loan, the consumer is generally approved for a very modest amount of money—normally less than $1,000. That money is placed in an interest-bearing deposit account where it cannot be accessed by the borrower. The borrower will pay off the loan over a compressed period of time, normally not to exceed one year. While the loan is being paid off, the lender is reporting that activity to the credit reporting agencies, thus helping you build a credit report.
Once the loan has been paid off, the lender will release the funds, plus the interest, to the borrower.
Become an authorized user on someone else’s credit card. The authorized user strategy is when an existing cardholder adds another consumer’s name to his or her account and “authorizes” that consumer to use it. The authorized user receives a card with his or her name on it, and that consumer has full access to the card’s line of credit.
Most credit card issuers report the activity of the account to the authorized user’s credit reports. And if the account has always been paid on time and has a low balance relative to the credit limit, then it will be very helpful to the authorized user’s credit profile.
Importantly, two of these three options do not require the consumer to acquire debt. That’s one of the many myths and misunderstandings of credit scores. They do not entice or require consumers to take on debt, and consumers can have a good credit score without large amounts of debt.