If you have never taken a loan you won’t have a credit score or report. This presents a unique problem – some lenders will not provide you with a loan or credit card because you have no payment track record for them to base a lending decision on.
Being new to credit may make it more difficult to get approved for a loan or credit card, but it’s not impossible. There are, however, some possible restrictions to keep in mind when you’re new to borrowing, such as limited options, cosigner requirements and higher interest rates.
Ways to Build Credit for Loans
1. Apply for a Credit Card
Most lenders and credit card companies hesitate to lend money to people without a credit history. This is because your credit history is the only way they can assess whether you will repay the loan amount on time or not. Therefore, to build credit, you must use credit.
Now the most important question that arises is without lenders willing to give you credit, how can you build credit? Luckily, there are a few ways you can use to overcome this issue.
One of the most common financial products that can help you begin your credit journey is a credit card. Applying for a credit card is the easiest and the most common way to build your credit score on your own. There are two types of credit cards that you can apply for secured and unsecured.
2. Secured Personal Loan
In case you are in urgent need of cash and want to qualify for a loan, but do not have adequate credit history you should consider applying for a Secured Loan. You can apply for a Secured Loan against any of your real assets such as Home, Car, Gold, Investments and deposits with your bank. With collateral, the loan application is swiftly approved even if you do not have a credit history. The bank will ask for your identity, address and income proof to approve your loan application.
3. Take a Consumer Loan
Buy a mobile phone or other consumer durable on installments: Today, when you walk into a store and purchase a mobile phone on installments, you’re being given what is known as a consumer durable loan. This is offered to many first-time loan takers (sometimes they don’t even know they are taking a loan).
4. Purchase on EMI
In case you neither need a loan nor a Credit Card, you can consider making a purchase on EMI using your Debit Card. You can shop online or at an outlet for any of the consumer durable goods like Mobile, TV or Laptop on EMI. Most of these FMCG products including household electronics are available at discounts and EMI plans. You can open an EMI plan for 6 to 18 months. The record of successful repayment of this purchase will build a clean history of repayment and thus a good Credit Score.
5. Low Limit Credit Card
Apply for a low limit credit card with the bank that has your salary account: The bank that receives your salary account can see that you have a steady income and should be willing to provide you with a starting-out credit card with a low credit limit (Rs. 15,000 to 20,000).
6. Loan Options for those New to Credit
It’s possible to qualify for a wide variety of loans if you’re new to credit even without taking the time to establish your credit history. In general, though, you’ll typically need a cosigner a loved one with a solid credit history to apply with you.
Cosigners agree to make payments on the loan if you can’t, so they reduce the risk you pose to the lender as someone with no credit experience. That reduced risk improves your chances of getting approved and could open the door to a favorable interest rate to boot.
If you don’t have a cosigner, however, here are your best options.
7. Credit-Builder Loans
Credit-builder loans operate a little differently than most loans. Instead of giving you the loan funds upfront, the lender deposits the money into a secured savings account while you make payments.
The lender reports your payments to the three national credit reporting agencies (Experian, TransUnion and Equifax), then releases the loan amount to you once you’ve completed your repayment term.
It’s not possible to avoid interest charges with credit-builder loans like you can with credit cards. But these loans typically charge lower interest rates than what you’d get with bad credit personal loans.
8. No-Credit-Check Personal Loans
Some online lenders and other financial institutions are willing to offer personal loans without a hard credit check. They may even use alternative data, such as your bank account history, to determine your creditworthiness.
It’s important to note, however, that some of these lenders charge triple-digit interest rates, which are very high though still not as high the interest on payday and auto title loans.
These are still a worthy option to pursue as long as you take your time to research your options and compare terms.
9. Payday Alternative Loans
Payday alternative loans (PALs) are short-term loans offered through select credit unions that offer much lower rates and more generous repayment terms than you’d get from a payday loan.
Loan amounts typically range from $200 to $1,000, with a repayment term of one to six months and an annual percentage rate (APR) that maxes out at 28%. The caveat is that you have to be a member of the credit union for one month to qualify, which doesn’t help if you need cash now.
In 2019, the National Credit Union Administration added another loan option called PALs II. This new category of payday alternative loans offers up to $2,000, with repayment terms ranging from one to 12 months. There’s also no waiting period after you join a credit union before you can apply.
Check with your local credit unions to see if they offer PALs and what you need to do to be eligible for one.