Lenders consider someone to have shallow credit if they do not have active accounts or their current accounts are new. As a result, these borrowers have an inadequate credit history and cannot demonstrate proper borrowing habits or repayment patterns to generate an attractive credit score.
Shallow credit may affect your ability to receive credit, such as qualifying for a mortgage, personal loan, or credit card.
Credit is a Catch-22. You need a credit card to build credit. However, credit card issuers are reluctant to issue a credit card if you don’t have credit. Fortunately, there are methods to build credit with no credit history.
If you have a checking account, you may qualify for a credit card with your current financial institution. Even if you do not yet have a credit score, your checking account and banking relationship may establish sufficient financial history to qualify for a credit card with your current bank.
Store credit cards are usually more accessible because the approval requirements are typically more lenient than unsecured credit cards from a bank. However, be sure to pay the bill in full, as store credit cards generally have high-interest rates.
Additionally, paying your bill in full and on time is a sure-fire way to build your credit steadily, which is your current goal.
Unsecured credit cards do not require collateral and are approved based on the borrower’s creditworthiness. As a result, someone with a shallow credit history may have difficulty qualifying.
To start building a credit history, secured credit cards can help. The borrower puts up a deposit to the credit card’s issuing bank. This deposit serves as the card’s collateral. For example, if you send a $500 deposit, the bank will issue you a $500 limit.
After several months of timely payments, your credit score will go up. You can either cancel the card to get your money back, or you may request to convert your secured credit card into an unsecured credit card.
While it may be challenging to apply for a mortgage with no credit, it is not impossible. You may qualify for certain home loan programs, such as an FHA home loan.
According to the FHA loan rulebook HUD 4155.1, a lack of credit history may not be used as a basis for loan denial. Instead, the lender must use a non-traditional merged credit report or NTMCR.
Lenders may look at your utility payment records, rental payments, automobile insurance payments, as well as other means of direct access from the credit provider. Therefore, although you may have a shallow credit history, with timely payments on your record, you may still qualify for an FHA loan. Check with your local lender to find out your options for a home loan and if you qualify for any special programs for borrowers with shallow credit.