What's your credit score if you've never had a credit card?

Many of you have asked what your credit score is if you've never had a credit card or line of credit taken out under your name.  The FICO score range is 300-850, so if you've never had any type of credit, your score is in the 300's.  The best thing to do as soon as you turn 18 is to have a small credit card that you pay off every month so that you can start building your credit history.

Having no credit is worse than having poor credit.  Typically, those with poor credit are in the 500 credit score range.  People who have filed bankruptcy are in the low 500's range.  Those who have poor credit still qualify for high APR loans to balance out the risk, but people with no credit cannot get a loan without a co-signer.

If you don't have any credit, the best thing to do is start establishing it now.

Get Your Free Credit Report Today

Per federal law in the United States, each person is entitled to a free credit report from all 3 agencies (Transunion, Equifax, and Experian) once each year.  Companies and websites that provide this free service also make money off of showing more detailed information about your report and score, but if you just want to know the score, you can go the free route.  It's always good to know what's on your credit so that you can take steps for credit repair if necessary.

Here's a link to a site where you can get your credit report: https://www.annualcreditreport.com/cra/index.jsp

Denied a Loan? Look to Your Credit and Income

A lender approves your loan based on the amount of risk you pose.  Your credit score is able to depict the amount of risk in a measurable number--the higher the score, the less risk you pose.  However, another component is how much money you have (assets) and how much money you make (income).

For example, if you have a high credit score (750 plus), but you only make $10 an hour part time and have $1000 in the bank, it's less than likely you'll be able to finance a car that costs more than $20,000.  To qualify, you'll need to put more money down or just end up getting a cheaper car.  The same concept holds true for home loans / mortgages.

Ultimately, it comes down to what you can afford AND your credit history.

Reader Question: Bankruptcy and the Future?

One of my readers asked how bankruptcy affects a married couple.  If a couple files for bankruptcy while married, both of their credit scores will be affected in the same way.  In a Chapter 13 Bankruptcy, they will be able to possibly keep their assets in a payment plan; but in a Chapter 7 Bankruptcy, they will have to let go of all their assets and start over.

If you are getting married and have filed for bankruptcy, it's best to hell your fiance beforehand.  As long as your partner has good credit, he or she can be the borrower, and you can be the co-signer on loans that you take out.  As long as your score is high, and both of your income levels are sufficient, it should not be too much of a problem; however, expect to get turned down from some lenders do the co-signer bankruptcy.  Alternatively, you could just have the loan in his or her name (not yours), and the only reason to put you on as a co-signer would be to get the extra income needed to qualify for the loan.

Additional Notes on Bankruptcy Affecting Your Credit Score

As a follow up to my previous piece, I wanted to provide more information on a bankruptcy's effect on your credit score.  Your credit score is only affected by Chapter 7 and Chapter 13 personal bankruptcies.  If your company is involved in a Chapter 7 or Chapter 11 corporate bankruptcy, it will not affect your credit at all--it will only affect that of your corporation.

This is the reason why people who are self-employed often incorporate.  It is best to keep your personal finances separate from your company finances.  Often, people pay themselves a salary under their own corporation so that if something happens to the company, that will be hurt but not personal credit.

Ultimately, bankruptcy is something to avoid on a personal level, but on a corporate level, it happens everyday.

The Effect of Bankruptcy on Your Credit Score

If you end up filing a Chapter 7 or Chapter 13 Bankruptcy, expect your credit score to dip at least 200 points.  All of your past open accounts will show that they're included in the bankruptcy, and you'll essentially have no liabilities.  In the case of a Chapter 7 Bankruptcy, all of your debt is eliminated after the sale of your assets.

Besides the dip in your credit score, the bankruptcy will show up as a public record on your credit report.  Even if you do build your credit score into the high 600's and low 700's 2-3 years after bankruptcy, which is totally doable, your bankruptcy will still be listed.  A Chapter 7 Bankruptcy will stay on your credit report for 10 years, and a Chapter 13 Bankruptcy will stay on your report for 7 years.  If they show up any longer than the stipulated time, you can appeal to the credit bureaus to have them removed.

However, years after these public records are removed from your report, creditors such as American Express keep records on those who have had their debts discharged via bankruptcy no matter how long ago it happened.

Does Adding Tradelines Increase Your Credit Score?

One method people use to boost their credit score (or repair credit) is adding tradelines, which is simply adding other credit accounts (usually credit cards) to your credit report to demonstrate more available credit.  If your ratio of outstanding credit to available credit is low (usually sub 20%), your credit score will not be negatively impacted.

However, when adding tradelines, you must be careful to to add multiple ones in a short period of time.  Opening up multiple credit cards and/or making a big purchase in a few months' span will greatly knock down your score.  Your credit score goes lower because you pose more risk when borrowing more money.  Fortunately, when all of these accounts are paid, your credit score usually increases to be a higher number than it was before.

Why Care About Your Credit Score?

Most people can't afford to make the big purchases in life (i.e. house, car, or business) without looking to some sort of a loan or financing for help.  When applying for a loan, your credit score is able to give a quick assessment of how much risk you pose to the person or company lending you the money.

Your FICO Credit Score (median score between the Equifax, Transunion, and Experian scores) takes into account your past and present borrowing history including magnitude, payment history, and any public records such as a personal bankruptcy.  The higher your credit score, the less risk you pose to your lender, and the less your cost of borrowing will be.

Ultimately, you should take care of your credit score so that your cost of borrowing will be as low as possible given the amount of assets you own and income you make.  However, if you have plenty of cash, you can just buy anything you want with "straight cash homey."  After all, that's how Randy Moss rolls: