What to do if You Have a Zero Credit Score?

What to do if You Have a Zero Credit Score?

Written by Mark Gregorski
Fact-checked by Caitlin Wood
Last Updated March 29, 2021

Your credit score is a financial metric that represents your creditworthiness to lenders. Whenever you apply for a loan, lenders will access your credit report to assess your ability to make timely payments. If you have a high credit score, lenders will usually be more than happy to approve your application. They may also reward you with a low-interest rate. But suppose you have a low credit score. In that case, they may be hesitant to provide you with funds, as your poor crediting standing indicates your less likely to honour your payment obligations.

The average person will at some point need to obtain a loan, whether it’s a credit card, mortgage, line of credit, or auto loan. Therefore, maintaining a high credit score is crucial. But what if you lack a credit score entirely? What are the implications, and what should you do to get one?

How Do You Get a Zero Credit Score?

A zero credit score signifies the absence of credit history. Without a credit history, credit bureaus have no way to rate your credit profile and, as a result, assign you a credit score of zero. There are several reasons why you might lack a credit score:

You’re new to Canada: If you’ve recently emigrated to Canada, you may not have had the opportunity to open an account or establish a significant payment history. While you may have had a credit score in your previous country of residence, that information has no bearing on your Canadian credit score.

Learn how to build your credit history as a newcomer.

You’ve never used credit: Unsurprisingly, your credit history is non-existent until you begin utilizing credit. If you’re young or have simply relied on cash to pay for all your purchases, there’s no record of past behaviour credit bureaus can use to assess your creditworthiness. Once you open an account and lenders provide you with access to credit, the credit bureaus will begin building a profile on you. 

Check out how you can build your credit in Canada.

You haven’t used credit for a long time: If you’ve abstained from using credit products for a considerable time, your credit history can become stale and outdated. As a result, credit bureaus will lack sufficient and timely payment data to assign you a credit score. It’s wise to keep at least one account open at all times and use it occasionally. That way, the credit scoring algorithms have some data to work with to determine your credit score.

Find out how the age of your credit affects your credit score.

What’s Worse? Zero Credit Score or a Low Credit Score?

Though you might be dismayed upon discovering that you have a zero credit score, it’s important to remember that it’s not equivalent to possessing a low credit score. 

Zero Credit Score

A zero credit simply implies that you have no credit history for lenders to gauge your ability to service debt payments – it’s a neutral position. However, without proof of your ability to manage debt, lenders will be hesitant to extend credit to you, viewing your lack of credit experience as a risk factor. 

A zero credit score can hamper your ability to rent a place to live, obtain a credit card, or secure a low-interest rate on a loan. Lenders may force you to put down higher down payments or deposits when borrowing large sums of money.

A low credit score means you have a tarnished credit history. The reasons for this can be because you pay late, utilize a massive portion of your credit limit, have defaulted on a loan, or have gone through bankruptcy. 

Find out who else can check your credit report.

Low Credit Score

A low credit score will limit your ability to access credit cards, obtain favourable rates on loans, and purchase expensive items, such as a home or car. You may also face difficulty acquiring a cell phone contract, securing employment, or getting approved for low insurance premiums.

Though you may face similar problems if you have a zero credit score or a low credit score, the latter is a much worse situation to be in. Bad credit takes more time and effort to repair than it takes to build a solid credit history from scratch. 

In addition, those who lack an adequate credit history have more options available to establish one. For example, new immigrants to Canada and students can take advantage of unique credit products that don’t require a credit history. Many large and established financial institutions offer banking and credit packages designed to cater to this demographic of borrowers. However, those with low credit scores will usually not have the privilege of qualifying for these products.

Check out how these services can help you rebuild your credit.

How Can You Build Credit When You Have Zero Credit?

If you lack a credit score, there’s a variety of things you can do to start building it up. 

Secured Credit Card

A secured credit card is a special type of credit card used by those seeking to build a credit profile. It functions like a regular credit card in that you can use it to make purchases. You’ll also be responsible for making payments by the due date, facing interest charges if you fail to do so. 

A secured credit card’s unique feature is that you must put up a cash deposit before the card issuer authorizes you to use it. This deposit functions as an incentive for you to use the credit card responsibly. The card issuer will refund your deposit once you pay off your balance in full and close the account. 

Secured credit cards are a great choice because they’re easy to qualify for and you can always upgrade to a regular credit card once you’ve built up some credit experience.

Learn how to switch from a secured credit card to a regular credit card.

Secured Loan

A secured loan is backed by an asset you own, such as a car or home. If you own something that you can pledge as collateral, you’ll be able to gain access to loan products from lenders. If you abide by the terms and conditions of the loan contract and make regular payments, you can quickly establish a payment history.

Secured loans are a great option as they’re relatively easy to qualify for. Lenders are willing to extend credit to individuals who back their promise to make payments with a personal asset. The asset reduces the lender’s risk, as they can liquidate it to make up the shortfall if the borrower defaults on the loan.

Credit Building Savings Loan

A credit building savings loan is a type of loan that helps you establish your credit and save money at the same time. Instead of a lender providing you with a sum of money upfront, you contribute regular payments over a specific time into an account. Essentially, your loaning money to yourself. 

As with regular loan payments, your lender will report your contributions to the credit bureaus, which will help you build a credit history over time. However, this isn’t always the case, so ensure you inquire with the lender about their policies. You don’t want to commit to a credit building savings loan if your payments don’t count toward your credit history.

Consider a Co-Signer

You can obtain a loan or unsecured credit product with the help of a co-signer. An individual who co-signs a lending contract with you legally agrees to assume the responsibility for the debt and all associated fees if you’re unable to make paymentsMost people use a family member or close friend as a co-signer.

Using a co-signer can help you qualify for a loan that you might otherwise not get approved for. As you make regular payments on the loan, you’ll slowly build a credit history. However, keep in mind that your co-signer is on the hook for the balance should you default on the payments. If they run into issues settling the debt, their credit score can suffer as a result, which can strain your relationship with them.

Frequently Asked Questions

How much information do credit bureaus need to calculate my credit score?

Credit bureaus usually require a minimum of six months of credit activity to calculate a meaningful credit score. Ensure you always maintain some level of activity in your credit accounts so that there are sufficient data for the credit bureaus to compile.

How is my credit score calculated?

Credit bureaus use various data to calculate your credit score. Below is a breakdown of the factors that determine your credit score and their weighting:
  • Payment history – 35%
  • Use credit vs available credit – 30%
  • Length of credit history – 15%
  • Public records – 10%
  • Number of inquiries into the credit file – 10%
Credit scores in Canada range between 300 and 900. Lenders usually consider any score below 650 a red flag. Borrowers who fall in this range may experience greater difficulty qualifying for credit products.

What’s more important, my payment history or credit utilization? 

Your payment history is a much more critical component of your credit score than your credit utilization, carrying a weight of 35%. In fact, your payment history impacts your credit score more so than any other factor, so focusing on establishing a stellar payment history should be your priority.

Bottom Line

Your credit score is a critical factor that lenders assess when they’re deciding whether to approve your application for a credit product. Without a credit score, your options to access credit are severely limited. You may only be able to obtain high-interest loans with unfavourable terms. Or you may be rejected altogether.

Luckily, there are many ways for you to build your credit history from the ground up, and most of these methods don’t demand any special qualifications on your part. Choose the one that’s best for you, be patient, and you’ll have an established credit score in no time.

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Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.

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