The only way to establish a credit history is to apply for and use credit. If you don't have a history of using credit, you won't have a credit report. Without a credit history, you may find it difficult to make major purchases, such as a home or a car, making establishing credit a wise financial move.
Credit Bureaus and Reports
Credit bureaus are receive and keep track of information about your use of credit. Many businesses submit information about your applications for credit, your payment history, and your credit limits to these bureaus. Each bureau then develops a report that lists your credit accounts and applications, making the reports available to any business or individual who has a legitimate business need to check your credit.
What No Credit Information Means
If you don't use credit often, or at all, you aren't alone. Many people prefer to manage their finances on a "cash-only" basis. While this is certainly a responsible approach, it also means that you aren't developing a credit history. If a potential creditor (such as a mortgage lender) requests your credit report from the credit bureaus, the bureaus may have very little, if anything, to include in your report. This can happen even if you did use credit in the past, but your former creditors no longer report your information to the bureaus. Unfortunately, without a credit history, many lenders won't be able to accommodate your need for a loan or credit, even though you've always paid your bills (in cash) on time.
Establishing Credit
Establishing credit can be difficult, but there are a few things that you can do to develop a good credit history, even if you've gone through most of your adult life without credit. Apply for a credit card at a retail or department store: Many of these stores only require that you have a credit history free of bankruptcy or recent charge-offs in order to qualify. Another option is to apply for a secured credit card. A secured credit card requires you to open a savings account into which you deposit an amount of money that can be used as collateral against your credit limit. Finally, if you've ever had a private loan or line of credit with a company that does not report to credit bureaus, ask if the individual or company is willing to report your payment history to the credit bureaus.
Alternative Credit Data
The Fair Issac Corporation, originator of the FICO credit score, now offers a new type of credit score based on "alternative credit data," such as information gathered from banks, landlords, and utility companies. Called an "Expansion Score," this type of credit rating is new, but may be of some use to people who don't have a long track record of using credit.
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