The 2 Biggest Reasons You Don't Have a Credit Score

Understanding what constitutes and drives a good credit score isn’t always easy, given all the nuances that go into assessing a person’s ability to repay a debt. It doesn’t help, of course, that millions of consumers don’t even have a credit score to begin with.

A new report from FICO sheds some light on why these folks (approximately 50 million consumers in total, by the major credit scoring model’s estimates) are getting shut out of the system. If you don’t have a credit score or your credit file is considered thin, it’s likely you fall into one of these two categories:

1. You’re being plagued by the mistakes of your past. FICO estimates around 18 million people haven’t had access to credit in years due to negative data in their credit files. Under traditional credit scoring models, they’re saddled with a score based on a moment of financial stress that doesn’t necessarily represent their current ability to pay off debts, including a credit card, auto loan or mortgage.

2. You haven’t been able to get credit. An additional estimated 25 million people don’t have credit files at all simply because of the age-old chicken-or-egg conundrum: You need credit to build and get credit. Without an established payment history, it’s hard for these consumers to get mainstream lenders to take a chance on them. And, if mainstream lenders won’t take a chance on them, well, then, they’re stuck in a perpetual Catch-22.

Scoring the Unscorable

FICO conducted the research as part of its alternative data pilot program, an initiative designed to create scores for the unbanked or underbanked. A lot of these consumers would be able to pay a loan back as agreed, FICO said, were they not hampered by a system that relied solely on sparse or old credit data. In fact, millions of consumers would score a 620 or higher if a lender used FICO XD, a new score the company developed that accounts for landline, mobile and cable payments in addition to traditional credit bureau data, the research found.

Remember, there are already a lot of credit scores out there being used to determine your creditworthiness. Traditional scores generally rely on loan history, but many industry stalwarts are experimenting with new data sources. Unfortunately, it could take a while for any new scores to pick up steam among lenders. (FICO XD, for instance, is still being tested, though 12 of the largest credit card issuers in the U.S. are participating in the pilot, it said.)

In the meantime, consumers struggling to build credit can try applying for a secured credit card, a credit builder loan or a personal loan and focus on making on-time payments. It also helps to at least generally know where you stand. You can pull your free annual credit reports (one from each of the three credit bureaus) at AnnualCreditReport.com or see your credit score for free each month on Credit.com.