Getting your first loan can seem daunting, especially if you have little to no credit history. You may wonder if qualifying for financing is even possible. The good news is that while challenging, there are options for first-time borrowers with no credit.
In this comprehensive guide, we’ll explain what it means to have no credit, share tips for building credit from scratch, review the best first-time loans to consider, and more. Whether you need funds for a major purchase, to pay bills, or to cover an emergency, read on to learn how you can get started on the path to responsible borrowing.
What Does Having No Credit Mean?
When you apply for any type of financing from a lender like a bank, credit union, or online lender, they will check your credit report and score to evaluate your creditworthiness. Your credit report provides details on your payment history, types of credit used, amounts owed, and other key financial information.
If you’ve never had a credit card, loan, or other line of credit, you likely have no credit file. This makes you what’s known as “credit invisible.” Lenders have no way to judge how responsibly you might handle future debts.
Being credit invisible is different from having bad credit. Bad credit means you’ve missed payments defaulted on debts or have other negative marks on your report. No credit simply means you have no track record at all.
Here are some common reasons for having no credit history:
- Young adults and teenagers getting started
- New immigrants with no U.S. credit accounts
- Relying on debit cards and cash instead of credit
- Not needing to finance major purchases in the past
Having no credit doesn’t automatically disqualify you from getting a loan. But it does limit your options. Building some credit first makes approval more likely.
How to Build Credit from Scratch
Establishing a strong credit history takes diligence and patience But you can start building now in preparation for when you need to finance larger purchases later Here are some smart strategies
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Become an authorized user on someone else’s credit card – Ask a parent or family member with good credit to add you. This lets you benefit from their positive history.
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Get a secured credit card – These require a cash deposit that acts as your spending limit and collateral. Use responsibly to show lenders you can handle credit.
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Open a credit-builder loan – Funds are held in a savings account while you make monthly payments. On-time payments are reported to credit bureaus.
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Use finance company credit accounts – Department store cards from places like Macy’s can help establish positive history if managed prudently.
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Review your reports – Check reports from all three bureaus at AnnualCreditReport.com to ensure no errors or suspicious activity.
Building credit takes diligence, but it’s worth it for the increased financial opportunities it unlocks. Even starting with one card or loan can start generating the positive history lenders like to see.
Options for First Time Loans With No Credit
When you have no credit, getting approved for an unsecured personal loan from a traditional lender is unlikely. But several alternatives exist that can help you start accessing credit while also building history:
Secured Personal Loans
These loans require collateral – often a savings account or certificate of deposit – that the lender can seize if you fail to repay the debt. By limiting their risk this way, lenders relax credit requirements. The cash from your collateral isn’t accessible until you pay off the loan.
Credit-Builder Loans
Similar to secured loans, the amount you borrow is held in a savings account while you make fixed monthly payments. Credit-builder loans demonstrate you can handle installment payments and help establish your credit profile.
Co-signer Loans
Adding a co-signer with strong credit is another way lenders mitigate their risk. This lets another person take shared responsibility for the loan. Consider this option only with extremely trusted individuals.
Payday Alternative Loans
Offered by some credit unions, these small short-term loans have lower rates than dangerous payday loans. Credit unions may offer more flexible qualification terms.
401(k) or Retirement Account Loans
Borrowing against a 401(k) isn’t ideal, but if you have substantial savings, it can provide access to funds at lower interest rates than alternatives. This approach should be a last resort.
Buy Now Pay Later Financing
Services like Affirm, Klarna, and Afterpay let you split purchases into multiple interest-free payments over 6 weeks or longer. This can help establish positive payment history. But deferred interest charges can apply if not fully paid on time.
Other Tips for First Time Borrowers
If you’re new to the world of credit, keep these pointers in mind as well:
- Only borrow what you can realistically payback based on your budget
- Make at least the minimum payment every single month
- Keep credit card and loan balances low relative to their limits
- Have a plan for financing emergencies beyond credit
- Monitor your credit regularly and dispute any errors
It can take diligence and prudent financial practices to open up financing options with no existing credit history. But taking the time to research lenders and build positive habits now can pay dividends down the road. Don’t get discouraged!
Key Takeaways
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Having no credit history can make getting approved for financing more challenging but is still possible in some cases
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Build credit strategically using secured cards, credit-builder loans, authorized user status, and other tools
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First-time borrower loans like secured personal loans and co-signed loans can establish your creditability
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Practice responsible credit habits like making payments on time and keeping balances low
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Be patient and don’t bite off more than you can chew as you access new credit products
Establishing credit for the first time takes diligence and discipline. But laying the groundwork now to have access to credit in the future can enable major life purchases. Do your research, explore all options, and build credit strategically as a first-time borrower.
Find the loan you’re looking for
There are many reasons why someone may not have any credit history. Maybe they are young and just starting out their financial future, or maybe they were recently divorced and their partner had taken care of all the finances in the marriage. There are many reasons somebody may have little to no credit history, but either way, getting an unsecured personal loan without any credit on record will be very difficult.
Lenders like to see some sort of history to get a snapshot of your ability to make payments on time. That in itself demonstrates that you can manage your money and use the tools you have in front of you to figure out how to make payments and keep track of due dates. It shows that there is some sort of stability in your life that you can use your income wisely and be responsible for your debts.
If you are only looking for an unsecured personal loan, chances are pretty slim unless you have a cosigner sign onto your loan with you. Having a cosigner with good credit sign on to a loan with you tells the lender two main things. First, that this person with good credit has enough trust in you to take responsibility for the loan if you should happen to default. And second, that there is a contingency plan in place for the lender to recoup their money if you should happen to default.
Is no credit worse than bad credit? +
This is a tough question to answer. Although no credit technically isnt bad credit, it still isnt good. You still are seen by lenders as a risk and many lenders will not take a chance on you. When you compare the two, it depends on how bad someones credit score really is. Do they have multiple bankruptcies on their record? Do they have numerous delinquent accounts in collections?
The benefit of having no credit history versus a bad credit score is that you can easily build yourself up into the good credit rankings, where someone with bad credit may take years to do the same. People who have bad credit will have certain negative marks on their credit reports for years. Missed payments, delinquent accounts in collections, and loan defaults will stay on someones credit report for 7-years. That will be a constant weight on their credit score while they are trying to lift themselves up. A bankruptcy can last on your credit report for ten years.
When you have no credit history, you are a blank slate. Sometimes it is a good thing to start from new.
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FAQ
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