There’s plenty of advice on how to build good credit history starting from scratch and how to turn a bad credit score into a stellar one. There are loans available for people with great credit, mediocre credit and even ugly credit. But what happens if you have no credit history at all and you need a loan now?
That’s a dilemma facing young people, new immigrants and those who have avoided debt for years but have no credit in their names. Many older Americans who have long retired existing debt, such as mortgages and car loans, also may find they lack enough recent credit history to generate a credit score.
Fortunately, all is not lost. It is possible to get credit without having a credit history. It’ll just require some more work. Some loan types offered to those with no credit provide more options, while others require a boatload more paperwork or collateral to get a deal done.
The good news is that once you get one of these loans, you will start building credit history, so the next loan or line of credit you’ll need will be easier to get.
This is the easiest type of credit to get without having past credit. There are three basic ways to start building credit.
1. Become an authorized user on a credit card belonging to a family member or friend. You can’t be denied because there is no application process, says John Ulzheimer, credit expert for CreditSesame.com.
The primary cardholder simply adds you as an authorized user and you get your own credit card with your name on it. The account and payment history will be reported to the credit bureaus, populating your newly created credit reports. The other advantage, says Ulzheimer? You have no legal obligation to pay the debt on the card.
2. Ask someone to co-sign to help you qualify. That means you and your co-signer are liable for the debt. If someone doesn’t pay it, each person’s credit linked to the account gets dinged.
3. Get a secured credit card. These cards require a security deposit that acts as collateral against your credit line. The amount of the deposit, typically between $300 and $500, equals the credit limit.
“Usability is an issue with secured cards because the credit limits are generally extremely low,” says Ulzheimer, “unless you are able to make a large deposit with the bank.”
The ability to get a personal loan without credit history is much harder than getting a credit.
“Banks operate on risk, and they have to properly underwrite loans to make sure they are making prudent loans to people who can pay them back,” says David Pommerehn, senior counsel for the Consumer Bankers Association.
In most cases, the consumer would need to borrow against their home to get a personal loan with no credit history. That may work for Americans who have paid their debt obligations, including a mortgage. In the absence of a credit file, the bank will look long and hard at a person’s income, other assets and the value of their home, Pommerehn says. In special circumstances, banks may consider other forms of collateral besides a home.
“It would be on a case-by-case basis,” says Pommerehn. “It would be a unique circumstance if another form of collateral was used.”
Otherwise, the options are limited. Consumers can get a co-signer to qualify for a small loan if a family member or friend is willing to take the risk. A handful of banks are toying with loans that consider direct deposit history of paychecks and allow consumers to borrow part of the deposit amount, says Pommerehn.
Auto lenders typically require the four C’s to give out a loan: credit, capacity, collateral and character, says George Hrisoulis, vice president of operations at Auto Credit Express. But if no credit exists, a lender may still OK a car loan if the other C’s are above average.
For example, have you been at your job for at least a year? Is it a full-time, permanent job with steady pay? Is the car payment less than 20 percent of your gross income? These factors, along with the length of time at your current residence and education, are other key measures auto lenders look at.
The lender also may require a larger down payment than the typical 10 percent or want the sales price to be close to the book value of the car.
“The lender wants to feel comfortable that there’s equity in the deal and that it is collectible should the borrower default,” says Hrisoulis.
Once again, another option is to get a co-signer, says Phil Reed, senior consumer advice editor at Edmunds.com.
The remaining alternatives are often costly, says Reed. Car title loans come with high interest rates, and buy-here-pay-here car lots often place GPS systems in cars for easier repossession.
Getting a home loan without a credit history takes more time, more manual underwriting and more paperwork.
“I can do loans like that,” says John Stearns, a mortgage banker with American Fidelity Mortgage in Wisconsin. “FHA is the answer.” He only needs three trade lines, such as cable, cellphone or utility bills that have a 12-month history.
The Federal Housing Administration, or FHA, insures mortgages against default through approved lenders and approves borrowers with riskier credit or smaller down payments. It provides nontraditional credit guidelines for consumers lacking credit history.
These lists show nontraditional credit items FHA considers for approving consumers with little to no credit.
Rental housing payments
Gas heating payments
Land-line telephone service
Child care expenses
Regular deposits into savings accounts
Group I accounts are considered more predictive of repayment than Group II payments, says Pava Leyrer, president of Heritage National Mortgage in Michigan. But several Group II items can make up for a shortfall of Group I accounts.
“It really depends on the strength of the terms,” Leyrer says. “This is a loan that can be given, so consumers need to speak to someone experienced to put it together correctly.”