If you are new to credit, it can be difficult to qualify for a loan. It is possible to get a loan with no credit history, but you may want to look into your other options.
What does insufficient credit history mean?
Simply speaking, this just means that you have little to no credit history. This can happen for a variety of reasons, including:
- Being new to credit, if you are just becoming an adult, you probably have not had enough time, nor the opportunity, to build your credit score.
- If you haven’t used any credit in two years or more, your credit score will not be accurate. No activity means there is no information for the three major credit bureaus to use to determine your score.
- If you just recently moved to the United States, you will have to build your credit score.
It is important to note that having no score is very different from having a bad credit score. No history of credit accounts means that a lender has no way to predict your behavior.
If you are looking to borrow money, it can be tougher to qualify for a personal loan or line of credit with no credit history. With a thin credit file, you pose an additional risk to lenders. They have no idea about your previous payment history, including your ability to make on-time payments and smart buying decisions.
How to fix insufficient credit history
Being credit invisible gives you the opportunity to build up your credit score. The best way to start building up your credit history is to apply for a credit card and use it responsibly. Be sure to make all payments on time and keep your credit utilization low.
If you are worried about excessive spending, look out for secured credit cards, and unsecured credit cards do not require a downpayment to serve as your credit line.
Other options include being added as an authorized user on a trusted family member’s credit card. This can help you build up your credit history without actually applying for a credit card. Be sure to check with the card issuer that your personal information and social security number is connected to the card so that the activity on it is being reported to the credit bureaus.
When you start building up your credit score, be sure to monitor your progress. You can ask for your free credit report from each of the three major credit bureaus once a year here.
Qualifying for a loan with little to no credit history
If you do need to apply for a loan or credit card with little to no credit history, you have a couple of options. In addition, some personal loan lenders are willing to take on borrowers with little credit history. If you decide to go this route, beware of high-interest rates and less-than-perfect repayment terms. However, this can give you the opportunity to build your credit with timely payments.
- Online lenders
There are a couple of online lenders out there that allow you to qualify for a loan with no credit history. They look into other factors about your life, including income, college major, job title, and more.
Banks and credit unions are great places to look for loans, especially when your credit history is thin. You should already have an established relationship with the organization. This allows them to check their records about your deposits, spending history and financial responsibility.
- Credit-builder loans
As the name suggests, credit-builder loans will help you build credit. These are small loans that are great if you do not need the money immediately.
These work by having you pay off the loan, with interest, before you receive the money. After all of the payments are made, you will have access to the full amount you borrowed.
- Secured loans
Secured loans require the use of collateral or an asset that you will give up if you can’t pay back the loan. When you offer collateral, you pose less risk to your lender. However, if you cannot pay back the loan, you will lose whatever item you listed, such as a car, savings account, jewelry, etc.
Finding a co-signer with a strong credit history will significantly increase your odds of obtaining a loan. In addition, it can help you qualify for lower interest rates and better repayment terms. However, only do this if you are positive you can pay the loan back. If you default on the loan, it will make your co-signer’s credit drop and they will be financially liable for the loan amount.
- Friends and family
Friends and family are another option for financial help, especially in an emergency. It is important to outline an agreement before receiving the money to not only keep yourself accountable but to also preserve your relationship with that person. Treat it like a contract that outlines how much you are borrowing, how often they should expect payments, and when you will pay off the loan.
Typically, these loans are best to avoid, especially if you have other options. No-credit-check loans have excessively high-interest rates, often 400% or higher. If you do need one of these loans, always pay them off before any other expenses.
No-credit-check loans are even more expensive than credit cards and any other loan type. In addition, they trap many people into a cycle of borrowing, leaving them stuck paying crazy high-interest rates on their debts. It is best to avoid no-credit-check loans at all costs.
Qualifying for a loan with little to no credit history is hard, but not impossible. Be sure to weigh out all of your options and shop around to see where you are most likely to qualify. Remember, building credit with no credit history is much easier than recovering from bad credit. Always make on-time payments and spend wisely.