No credit score usually means next to no options if the need to borrow money or take out a loan ever arises.
Everyone from the local car dealer to the furniture store with the banner advertising financing for customers with no credit may catch your eye.
But the truth is that most people with zero credit history won’t be approved for most loans when they need them most.
It’s not hard to understand why. Lenders want to see that you’ve demonstrated a responsible history of borrowing and repaying money before they do business with you.
A good credit history and credit score shows you can be trusted, but if your credit report is blank, finding credit with no credit can become a big problem.
Getting approved for a personal loan is one way to start building credit from the ground up, but be careful.
Many lenders will charge insanely high interest rates and one-sided terms that can hurt your credit more than help it.
The key is to taking the right steps when searching for the right loan (and lender).
What Does It Really Mean to Have ‘No Credit’?
No credit doesn’t mean bad credit. It’s not the same thing as a poor or low credit score, and it’s not old credit, where you have no recent credit history.
No credit means having zero credit activity to your name.
Eschewing credit may be a matter of personal preference. You might use cash or a debit card to avoid going into credit card debt. Or, you prefer to lease your car or apartment versus financing an auto loan or mortgage.
But those don’t do your credit score any favors; it’s money in, money out of your checking account that doesn’t get reported to the major credit bureaus in charge of compiling your credit history for future lenders to see.
Without credit, it’s unlikely that you’ll qualify for a conventional loan or be approved for a credit card, at least not without extreme interest rates attached, or being required to pay a large down payment to compensate for a lack of credit history.
So, you’ll need to start developing some creditworthiness to become more attractive to lenders. But do you truly have no credit, or is there some credit history you’re forgetting?
First, check your credit report. You can obtain a free copy through a site like AnnualCreditReport, or by signing up for CreditKarma. You’ll get to see your credit score and credit history. (Checking your own credit score won’t affect your credit.)
If there’s nothing to report, don’t worry; confirming your credit status confirms where you stand, and where to start building credit if you’re new to the credit game.
Personal loans for those new to credit
A personal loan’s versatility is what makes it such a great financial tool.
Called a “personal” loan for a good reason, the money you borrow can be spent towards personal expenses: anything from a vacation, to financing home improvements, gift shopping, paying for a wedding or big purchase, paring down student loan debt, or refinancing a credit card.
They’re also great credit builders if you can get your hands on one.
Not only can you use a personal loan for most of what your heart and finances desire, but process of borrowing money and paying it off on time, in full, is what counts towards creating and strengthening a credit history.
But brace yourself. Most personal loans don’t come cheap, especially for people with zero credit.
Lenders may impose double-digit interest rates and steep penalty fees to mitigate the lending risk they’re taking with you -- so steep, in fact, that it can make paying back the loan a difficult mountain to climb, especially if you borrowed up to $50,000, the maximum most personal loans come available.
Fall behind your payments or carry a balance for too many months, and you could wreck your credit before it’s even started!
So, look for alternative lenders with a more open mind towards new borrowers and folks without much credit:
Credit unions, known for their customer-centric and member-based focus, are one place to look for personal loans.
They may be more likely to overlook a negative or nonexistent credit history and give customers a chance based on other factors.
Your character, checking or savings account activity, your employment status, even your grades in school may all convince a credit union you’ll be a good borrower.
Pledge to repay the money, and they’re likely to give borrowers with no credit a real chance, complete with more flexible terms and low interest rates.
Online lenders are a lot like credit unions; whereas credit union are not for profit, online banking providers lack the overhead costs associated with running and manning physical walk-in branches, so they have a lower need to charge unnecessary fees, surcharges and interest rates to stay in business.
Their aim is to satisfy customers with attractive services and fair terms and conditions, and personal loans are no exception.
Here, an online lender may be willing to work with someone with no credit by offering them a lower interest rate and a more amenable repayment schedule.
Family or Friends
Ask family or friends to borrow money. We must note that this is not a recommended option as it can be dangerous for the relationship(s).
Does it even count as a personal loan? Of course, it does; money is borrowed, terms are agreed upon, and the funds are repaid. However, these kinds of loans are usually not recorded on your credit reports.
Still, to avoid any problems, if someone is willing to lend you money, make sure to document the loan to keep a record of what’s owed and what’s been paid.
Another more official alternative?
Finding a peer-to-peer or P2P loan; still considered a loan between two private parties, you can seek one out through one of many online platforms.
What’s needed to get approved for a personal loan
Obtaining approval on a personal loan with no credit is a challenge for sure, so it’s important to cross your t’s, dot your i’s, and provide your prospective lender with all the documentation they require as you apply for your funding.
Here’s some of what you’ll need:
A lender may need proof of driver’s license, birth certificate, Social Security card, or a passport to verify you are who you are.
They may ask for one or combination of these documents, but in each case, make sure it includes your date of birth. (In some cases, you may need to provide your mother’s maiden name.)
Proof of address
A utility or cable bill, rent statement or other official document displaying your current mailing/billing address may be needed in your loan application. Depending on the lender, they may request a history of previous addresses, or your current employer’s address.
Proof of income and debt
If you have no credit history, you’ll likely have no proof of past debt, so it’s important to provide a solid employment history and proof income.
These could be job offer letters with salary clearly displayed; pay stubs; a copy of your W-4 form; income tax statements from the past few years; or bank statements, like checking or savings account balances.
Improving your chances of getting a personal loan
With enthusiasm and documentation in hand, someone new to credit can expect their personal loan application to be approved with flying colors.
But remember to be realistic; even the most alternative and understanding lender may still have reservations about lending money to those with zero experience with credit.
Don’t despair going in. Instead, maximize the ways you can improve -- guarantee, even -- your chances of getting a personal loan. You’d be surprised what things can help build credit:
Get your rent reported
Apartment leases aren’t credit based, so your monthly rent checks to your landlord don’t count towards building your FICO score.
But you can arrange to have your rent payment activity reported to all three credit bureaus to start shaping your credit history and increasing your score -- essentially having the same effect as you would if you were paying off a mortgage loan.
Open a secured credit card
Everyone should have a credit card in their wallet, and if you’re going to have a credit card with no credit history, a secured credit card is the way to go. They’re ideal for people who can’t qualify for a regular credit card, secured by a cash down payment that acts as your credit limit.
Keep your credit usage to no more than 30 percent of your credit limit, avoid carrying a balance, and pay off your card at the end of each statement to keep your credit health in shape, reflected by a credit score on the incline.
Concentrate on student loans
If you’re college-bound or a current student, your student loans may take priority over personal loans at the moment.
A credit history isn’t required when applying for federal student loans; they’re available to all applicants attending accredited schools, and interest rates are fixed. The best part? Repaying your loans make one of the most positive impacts to your credit history and score.
If you're having trouble managing your monthly payments, consider refinancing your student loans to help you get a lower interest rate and better repayment terms.
Taking some of these smaller steps before seeking a personal loan can improve your chances of getting approved for other loans in the future.
“No, credit, no problem!” is a familiar eye-rolling trope you’ve no doubt heard a million times before. But technically, it’s true.
Having no credit isn’t a problem when you know how -- and where -- to start building credit.
Look at developing credit as a holistic process; it should play a part in every part of your financial life, whether it’s a personal loan you’re seeking, or anything where you credit score and history matters.
When you’re approved for a personal loan, use the money wisely, from start to finish.
Aim to borrow only as much as you need, and pay your balance on time, in full, to make a good impression on your lender, but most importantly, on your credit report, where positive credit experience works in your favor for any loan you may seek.