Insufficient Credit References

Companies want to see how responsibly you use credit before they extend new credit lines to you. This policy makes opening accounts difficult if you do not already have some credit references. An insufficient credit history is problematic, but you can use certain account types to build up some references and increase your access to loans and major credit cards.

Importance

Sufficient credit references are important because of the way in which your credit score is calculated. Scoring formulas use your credit lines, repayment history, account variety and the length of time in which you have used credit to determine a three-digit indicator of your creditworthiness, according to the Fair Isaac scoring website. Scores range from 300 to 850, with a low score being below 600.

Types

Whether you have sufficient credit references does not just depend on your total number of accounts. Lenders want to see how you handle both installment loans and revolving credit lines such as credit card accounts. Your credit score is lower if you do not have some variety in your accounts, like one or two major credit cards and a personal loan, car financing or some other type of installment account.

Options

Secured credit cards let you build up references with major card brands even if you do not qualify for traditional revolving accounts. A secured card issuer gives you a credit line, but you back it up with a bank deposit in the same amount. For example, you deposit $500 and get a Visa or MasterCard with a $500 spending limit. The credit card company has the right to take your deposit if you default. Your secured card information gets reported to the major credit bureaus and acts as a reference when you apply for other accounts. You can also build up your history by getting a credit card or loan with a co-signer.

Considerations

You may not have to use secured cards or co-signers to build up sufficient credit references. Apply for a revolving account with a specific retailer or chain of stores or gas stations. Store and gas cards usually have lower approval thresholds. The companies report your account data to the credit bureaus, allowing you to use these cards as credit references.

Warning

Use secured credit cards and co-signed accounts carefully to avoid problems. Secured credit card issuers often charge for applications and impose higher annual fees and interest rates than regular cards. Some even add monthly service charges, so shop around for the best terms. You are equally responsible for a loan or credit card that you hold with a co-signer, and you hurt the other person's credit score if you pay late or default.