Sometimes it seems that you’re in an endless circle when you have no credit. You need credit to be able to borrow money, open up a credit card, and buy the things that help you build credit. Without a credit history, how are you supposed to manage that?
This is a struggle that some 26 million Americans who are considered “credit invisible” are facing, according to the Consumer Financial Protection Bureau (CFPB). When someone is considered credit invisible, they don’t have a credit record with at least one of the three credit reporting bureaus: Experian, Equifax, and TransUnion.
Lenders have to look to alternative data when considering a credit-invisible applicant. This data could include a history of paying rent and utilities as well as maintaining a mobile phone account. While certainly not as strong of an indicator of how much of a risk it would be to lend to such a person, this data can be considered and lead to the extension of credit — which moves you into a credit-visible position.
In this article, we’ll look at some things you can do to get on the credit map and build a credit history so it’s easier for you to borrow in the future.
- How to get a loan with no credit
- How to build your credit
- You’ve got options — even if you’re credit invisible
How to get a loan with no credit
While they may not be the ideal solutions you’re looking for, there are several options for someone with little to no credit looking at how to get a loan.
Apply for a credit-builder loan
A credit-builder loan is a small, non-traditional type of loan that you can apply for through a bank or other lender. Instead of the bank giving you a specified amount of money to spend and then pay back, it opens an account that you’ll make monthly payments into for a set number of months.
The bank reports your timely payments to the credit bureaus, which starts building your credit history and score. At the end of the term, you collect all of the money you’ve paid into the loan, plus any interest that may have been part of the agreement.
It’s OK if this loan is small, as the amount you “borrow” isn’t what’s important — your timely payments over the course of the term are what counts toward our credit score. If you’re considering a credit-builder loan, look for one that will enable you to easily make those payments every month without putting your budget under strain.
Even though these loans are small, like a payday loan may be, credit-builder loans are much safer. With payday loans, you borrow money that’s due for repayment the next time you get paid. The CFPB says that most consumers can’t pay back the money in time and end up taking additional loans to cover what’s owed.
This starts a debt cycle that multiplies interest and fees. The whole purpose of a credit-builder loan is to build credit and set aside a stockpile of money, while making payments you can afford.
Before taking out a credit-builder loan, make sure you understand how interest will be accrued over the term of the loan, and ask if any of that interest gets credited back at the end. You may want to contact several lenders to compare offers and rates.
Talk to your credit union
If you have poor or no credit, credit unions are a good alternative to traditional banks. They’re not owned by large financial institutions or corporations looking to generate maximum profits.
Credit unions operate under a not-for-profit status and are owned by their members (i.e., anyone who has an account). Profits are reinvested into the organization and paid to members in the form of dividends.
These financial institutions aren’t subject to the same taxes as traditional banks and are generally more interested in supporting their members than making tons of money on loans. This translates into more opportunities for members to get loans with lower fees and interest rates, as well as to be approved with riskier credit histories.
Just about anyone can become a member of a credit union. Each one has membership criteria, but most have some pathway to membership, such as making a donation to a charity, if you don’t meet traditional requirements.
Finding a credit union you’d like to join is a good first step toward getting the loan you need. Take some time to talk with someone from the credit union about your situation, what products the credit union has to offer, and whether or not they might be a good fit for what you’re trying to accomplish. Be sure to ask about the types of loans and credit requirements if you’re looking to establish credit.
Find a co-borrower
A co-borrower is someone who signs onto a loan with you to provide the bank more assurance that it will recoup the funds it lends you along with all the interest it charges. Once the co-borrower signs onto the loan, they’ll be just as responsible for paying the money back as you are.
The loan will also appear on their credit record, and they’ll benefit from the timely payments you make. Their record will also be negatively impacted if those payments are late or skipped.
If your credit score is low or you have no credit history, someone who has a stronger score can help you get the loan you need to start building your file. However, you’re asking them to put their own financial future in your hands, which is a risk for them to take. This can make finding a co-borrower challenging.
When you do sign onto a loan with a co-borrower, keep in mind that if you cannot make your payments, their financial assets can be tapped to make up for missed payments. It’s a good idea to only get into this type of situation if your monthly budget can easily handle the added expense of the loan payment.
How to build your credit
Building your credit takes time and discipline, but there are some simple things you can do to get started.
Add utility or mobile phone payments to your credit report
You pay your electric, water, phone, TV, and internet bills every month, yet this good behavior has no impact on your credit score. Most utility companies don’t report their accounts to the credit bureaus, which can be good if you miss a payment. But overall, a steady history of paying your bills could be boosting your credit score.
Experian Boost is changing this by allowing consumers to connect the bank account or credit card they use to pay their utility bills, which then shows a positive payment history for these items. This can result in an immediate improvement in your FICO score but can also detract from it if your payments haven’t been consistent. You have the option of removing Boost from your account if this is the case.
Become an authorized user
Many credit cards allow the cardholder to designate an authorized user. They’ll issue a card in the user’s name, which can be used by that person to make purchases. Those charges appear on the account holder’s statement, and they are responsible for payment of the bill.
If the bank that issues the credit card reports you to the credit bureaus as an authorized user, you'll gain the history of the card’s use in your file. This can be a good way to generate some credit history, provided the account is paid monthly and doesn’t keep an excessively large balance.
If you’re thinking about becoming an authorized user, consider how responsible the cardholder is about making payments and spending. Also take stock of how you’ll use the card and if that usage will be all right with the cardholder. Like with a co-borrower situation, you could end up with either positive or negative results from this relationship.
Consider a secured credit card
One final option to consider is getting a secured credit card. This is a non-traditional credit card that you make a payment to as a security deposit. The amount you pay is what you’ll be allowed to spend on the card. It’s kind of a prepay opportunity that helps you build your credit history at the same time.
Because you’re providing the money that will be spent using the card, this is considered a low-risk opportunity by most banks. Starting your credit building with a secured credit card prior to applying for a loan is a good idea to consider.
The following cards are some options you may want to check out:
- Secured MasterCard from Capital One: This card offers a $0 annual fee and an opening deposit of $49, $99, or $200, depending on your creditworthiness.
- Discover it Secured: This one offers up to 2% cash back on purchases and a minimum security deposit of $200.
- Citi Secured Mastercard: You’ll need a minimum $200 deposit to open this card, and your credit limit is equal to your security deposit.
Check out our Secured Credit Cards Guide to learn more about how these cards work and how you can use them to become more credit positive.
You’ve got options — even if you’re credit invisible
Yes, getting a loan when you are credit invisible or have poor credit can be a challenge. However, there are still options out there that will not only let you find the funds you need but will help you build the credit required to borrow more in the future. The key is finding which one fits best with your situation.