What is credit and why does it matter?
A good credit score can have a positive impact on your life in many areas, such as purchasing a house, car or even getting a lease on a new apartment. Your credit score is a number that helps businesses make decisions about whether or not to grant you a loan — and, if so, how much risk they are taking on in the process.
Your score can also impact the terms of the loan, such as how long you have to pay back the balance and what interest rate you’ll have to pay.
The standard FICO score, which is the most widely used among lenders, can range anywhere from 300 to 850. The higher that number, the higher the likelihood that you’ll get better terms. A higher score indicates to lenders that you’re perceived as less of a risk, so companies are more willing to give you more favorable terms for loans. If you’re considered a high risk to a lender, you may find it difficult to get loans and may find yourself stuck with the worst rates.
Experian breaks down score bands by score range well in this graphic:
A credit score of 700 or higher is usually considered a good credit score and a score 800 or above is considered excellent. People who have fair or poor credit may start to find it hard to get competitive rates on loans.
What if you have no credit or a thin credit file?
People who have thin credit files or no credit history at all might find it difficult to qualify for loans, credit cards or a mortgage, among other things. Because credit reports are used by lenders often to tell whether or not an individual is a responsible borrower, if that report is empty or nearly empty, it’s difficult for them to make a call one way or another.
That’s because without a credit history, lenders won’t be able to give you a credit score. Yes, there’s a big difference between your credit score and your credit report.
To think of it a different way, imagine that you’re a college student. Each of your exams is one part of your credit report and your credit score is based on how your perform on all of your exams so far. If it’s your first day on campus and you haven’t taken any exams yet, it would be very difficult for someone to determine whether you’re a good student or not.
“The problem is if a person hasn’t borrowed money, he or she can't get a credit score,” Jennifer Hemphill, AFC® says. “It’s hard because you’ll end up either getting denied outright or pay absorbent interest rates even if you can get a loan.”
The more often you use credit, the richer your credit report will be. The information recorded in your report includes the types of loans you have, how much you owe and whether or not you make timely payments. With that information at hand, lenders then can calculate your credit score and grant you access to loans.
The key measures lenders use to calculate your credit score are as follows:
- Are you making on-time payments? (35% of your score)
- How much credit debt are you using compared to the credit that’s available to you? (35% of your score)
- How long you’ve been using credit (15% of your score)
- How many different types of credit you have used (10% of your score)
- How many times you apply for new credit (10% of your score)
If you’re more of a visual person, here’s how it breaks down in a chart, courtesy of MyFICO:
Jennifer suggests that to build up your credit, you need to understand factors that determine your credit score and make sure to follow them.
“Your payment history, number of loans, how many inquires you’ve had and the length of credit history all play a part in determining your credit score,” she says. “If you make sure you pay your loans on time and not take out too many loans, you’ll be able to get a good score much faster.”
Keep in mind that there are different credit rating bureau, meaning that your score could be different depending on the bureau lenders look at. This is because credit bureaus don’t necessary share information with each other. Furthermore, your lender is required to report accurate information to any one of the three major credit bureaus (Experian, Equifax, TransUnion) but they don’t need to report it to all three credit bureaus. If this happens, there may be a delay in the types of information shared which could affect your credit score.
Loan options for people with no credit score
If you have a thin credit file, don’t worry. Everyone starts from somewhere.
To start building a good credit history, you’ll need to apply for credit. There are lenders who are willing to approve loans for people with no credit, but your options will be more limited. Here are some options on how to get a loan with no credit:
Secured credit cards
A secured credit card requires a deposit upfront. Then, you’ll make monthly payments for a certain period of time. Those payments will be reported to a credit bureau and your score should improve so long as you make all your payments on time and keep your utilization low. Just be careful to pay the card off each month, because you don’t want to get stuck paying high interest fees on top of it. Some secured card lenders will upgrade you to a regular credit card after you’ve proven you can manage a secured card. This option is best for those who want a credit card and have exhausted all options for unsecured credit cards.
Student credit cards
Many lenders offer students credit cards despite their thin credit files in the hopes they’ll become lifelong customers. All you need to is to show you have some income to make the monthly minimum payments. However, you may only get a low credit limit and high interest rates. Check out our list of the best student credit cards here.
Retail credit cards
Retail cards are generally fairly easy to get approved for, because retailers know that the harder it is for people to apply for credit, the less money they stand to earn from credit card users. It’s no secret that retail credit cards often come with scarily high interest rates. So we’ll offer a word of caution: If you do apply and get approved, be sure you’re only using it a credit building tool. That means you’re spending only what you can afford to spend and you pay it off in full each month. The downside of retail cards is that you may not be able to use them anywhere except for the retailer itself, but you may find co-branded cards out there that have wider acceptance.
Joint credit cards
Those who want to build their credit scores could benefit from a joint credit card. For example, two spouses could apply for one card but both hold responsibility for payments. If the two people are responsible, great. But there’s a risk, too. It also means if one or both of you aren’t making on-time payments, both of your scores could suffer.
Becoming an authorized user on a credit card
If your partner or family member has good credit, you might want to be added on as an authorized user on their card to build up your credit. The primary cardholder holds liability for making on-time payments, while your score will benefit from their good behavior. However, the primary cardholder can remove you from the account at any time.
Personal loans for those with poor credit
Getting a personal loan is another way to build up your credit score. The following lenders works with those who are applying for loans with no credit:
- OppLoans - This is an online lender who works with people who don’t have robust enough credit histories to have a credit score yet. Their online application process takes minutes and you can find out if you’re approved for a loan up to $5,000 without impacting your credit score. Keep in mind that their loans aren’t available in all states. Depending on location, their rates start at 36% with terms from 9 to 24 months.
- Upstart - This lender will consider applicants who don’t have a score. You may be able to borrow from $1,000 to $50,000 with three or five year terms. Their APRs range from 7.43% to 29.99%. Most applicants are able to get funds after one business day once they accept their terms.
Before you apply for credit, you should request a free annual credit report from all three credit reporting agencies. Even though you may not have enough information to generate a credit score, you never know if there is an error in your credit report. Things like a lender reporting incorrect transactions, mixing up identities or someone trying to steal your identity could happen, so dispute any errors if you see any.
To get your free credit report, visit AnnualCreditReport.com or call 1-877-322-8228
Get prequalified. You should also check to see if a lender offers a pre-approval form, which only requires a soft credit pull and won’t harm your credit. A positive pre-approval doesn’t 100% guarantee you’ll ultimately be approved, you can at least take a calculated risk before you apply for credit full-stop, since that will trigger a hard pull on your credit report and could hurt your score.
If you’d rather get a personal loan than a credit card, here are more options to check out:
- LendingTree. Lending Tree, which is the parent company of MagnifyMoney, partners with many different lenders. By filling out a short online form on the personal loan page, you may receive quotes from several lenders, including lenders who may be willing to work with people with poor credit or very little credit history. Pick and choose ones with better rates or terms.
- LendingClub. This is a peer-to-peer marketplace lender. Borrow up to $40,000 and receive your money in as little as seven days. Fixed APRs range from 5.99% to 35.89%, however, if your poor credit you likely will be stuck with the highest rates. You can choose between a three or five year term with no prepayment penalties. LendingClub does charge an origination fee, however, which will be charged as a one-time fee of 1-6%. And since it’s charged when you receive your loan, it’s deducted from your loan balance, which means you’ll get the amount you applied for, less the origination fee.
- Avant. Borrow from $2,000 to $35,000 with fixed APRs ranging from 9.95% – 35.99% and loan terms of 24 to 60 months. Not available for Colorado, Iowa, West Virginia, and Vermont residents.
- Prosper - Prosper is similar to LendingClub and is also a peer to peer lender. Borrow anywhere from $2,000 to $35,000. Fixed APRs range from on 5.32% to 35.97% on 3 and 5 year terms.
- Credit unions and local banks. Don’t forget to check credit unions to see what they could offer you. Theses institutions may have competitive rates and offer smaller loan amounts for its members. Loan officers may even more be willing to work with you on getting a loan compared to bigger companies.
How to build your credit score
Building your credit score doesn’t have to be hard. It will not be a quick process, but as long as you are consistent and exhibit all the signs of a trustworthy borrower, you’ll be able to build a good credit score.
Make payments on time. First and foremost, making payments on time will significantly impact your credit score. You want to show lenders that you can make at least the minimum payments every month. Any late payments will most likely show negatively on your report.
Keep your balances low. You should strive to pay as much of your balance off each month as possible. You can get away with making minimum payments, but you won’t help your utilization rate that way, and utilization rate is also a large component of your credit score, as we discussed in beginning of this post. The closer your balances are to your credit limit, the more negatively it’ll impact your score.
Don’t open too many new accounts in close succession. You’ll also want to consider how often you apply for credit. Every time you apply for a loan, you’ll get what’s called a hard inquiry on your report. One or two credit inquiries may not affect your score significantly, but if you apply for multiple loans or credit within a short period of time, your credit score may fall.
If you follow these steps consistently, over time you’ll be able to build your credit score.
Things to watch out for
Just because there are many products and services to help you build your credit, doesn’t mean they’re all equal. No check or instant approval credit loans such as payday, title or no check credit loans may seem like a good idea as they offer access to cash quickly. However, they often come at a steep price.
Payday loan companies have you write a check for however much you want to borrow in addition to a set fee. You’ll borrow that amount and hold onto the check until your loan’s due date which is usually your next payday. The problem is that they come with high rates and you could find it hard to pay back the loan. If this happens, you’ll pay more fees to extend the loan and pay even more in interest.
Title loans are often no better. Instead of using your paycheck as collateral, you put up your car’s title as collateral for a loan. The loan amount is usually the equivalent of your vehicle’s appraised value. The term is typically around 30 days and also come with high APRs. If you can’t pay back to loan, you’ll end up paying more fees or run the risk of having your car repossessed.
These options aren’t a good idea if you want to build a good credit score. All of these loan options are extremely expensive for borrowers and have severe consequences for delinquent payments. If you don’t have credit, you can use options that are much cheaper and with more favorable terms.
Barclays Online Savings Account
Synchrony Bank High Yield Savings
Synchrony Bank 12 Month CD
Goldman Sachs Bank USA High-yield 12 Month CD
* All banks listed are a Member FDIC.