When you speak of insufficient credit history, this only means that you don’t have a proven track record with the creditors lending money as well as other assets.
It doesn’t matter if you are applying for a line of credit, a student loan, a personal loan, a rental property, or anything similar. There is always another property that counts on you to carry out your promise of paying back what you owe.
Common examples of the parties that might want to gain access to your credit report are the following:
- Financial institutions and banks
- Insurance companies
- Auto loan lenders, mortgage lenders, and other lenders
- Employers and landlords
Credit History and How It Affects Credit Scores
Even though majority of consumers start to accumulate history during their mid 20s to late 20s, it was revealed that there are still some adults who are credit invisible. This means that they have zero credit history instead of a mere insufficient credit history.
The three main credit bureaus, Equifax, Experian, and TransUnion, are tasked to collect and maintain the general population’s creditworthiness. Lenders as well as other parties interested in the creditworthiness of a person can inquire about the credit score of the borrower. Credit scores could range from very poor credit at 300 to excellent credit at 850.
The algorithm for credit score calculation contains five key components assigned with the weights below according to FICO
- Payment history at 35%
- Amounts owed at 30%
- Length of credit history at 15%
- Credit mix at 10%
- New credit at 10%
With a quick look at the breakdown, you can clearly see that the most crucial area of your credit score is to make on-time payments on a regular basis for amounts equal to or greater than the minimum amount due. It is also imperative to stick to a low debt to income ratio. This means that the amount of your owed debt must be relatively lower than your income.
The different credit reporting bureaus use somewhat different methods to calculate your credit score. For instance, TransUnion reports that the payment history makes up 40% of credit score with the length of credit history accounting for 21%.
Is It Enough to Have One Year of Credit History?
You will typically need a credit history for 6 months for major credit bureaus to calculate and report your credit score. However, the credit score might be inadequate to be approved at a reasonable rate that depends on the particular type of loan you need.
The loan’s payback period and interest rate often depend on the credit score you have that will then depend on your credit history. For instance, it is not likely that you will be qualified for a 30-year mortgage if your credit history is less than a year.
Remember that you won’t have a single credit score forever. You should continue proving your creditworthiness through making on-time payments and the least payment due.