Getting credit with no credit history

If you have applied for credit for the first time and been refused, you may be wondering why the lender made this decision. If you have a bad credit history – e.g. you have missed repayments or defaulted on debts, then it may make more sense that a lender would not want to offer you credit. However, if you’ve never borrowed money before, why would a lender refuse you credit? We discuss this below and also explain how you can start to build a credit history.

Why is a credit history important when getting credit?

When you apply for credit a lender has to make a decision on how likely you are to repay the loan and how much interest they should charge you. This is important, because lenders do not have unlimited funds to lend and must make an informed decision on which borrowers are most likely to pay the money back.

Each lender will have different information and different tools they use to make their decisions, but typically they will use your credit history together with your application data. If you have no history of using credit, then lenders will have no information about past behaviour to use when making their decision.

Not having a credit history may seem like a clean slate – if you have never had to rely on debt, then surely that’s a good thing? However, even if you have always been financially prudent, the reality is that lenders want evidence that you can use credit responsibly and make repayments.

What products do you need a credit history to get?

You’ll need a credit history to get everything from personal loans to mortgages, but also products like pay-monthly mobile phone contracts and utilities paid by direct debit. It’s not impossible to get credit cards with no credit history, but you will be limited in your choice of card.

If you want to purchase a product using a finance scheme, the supplier will need to run a credit check before it is approved. This could be anything from finance on a car to everyday household goods like a sofa or more uncommon services like laser eye surgery.

Considering the variety of products that require some kind of credit history its likely you will have encountered one or two, but, if you’re a young person or someone who has recently emigrated, you may not have any credit history at all. You can always check your credit report to find out what credit history you may or may not have.

What are the alternatives for someone with no credit history?

If you need access to cash, but find it difficult to get access to credit, there are a few different options. The most obvious solution would be to use savings, although this may not always be possible, especially at short notice. You could approach a credit union, which is a type of co-operative where members pool money to offer credit at lower rates. You would need to be a member of the union and membership is usually contingent on having something in common with other members, such as living in the local area or belonging to the same organisation. Credit unions will still be interested in your credit history, but may be more flexible in offering loans to people with poor or limited credit history.

Another alternative would be to get a secured loan, this is where you use an asset as security (sometimes known as ‘collateral’) for the loan. If you cannot repay the loan, you may end up losing the asset you have used as security, so it is important to consider the risk of taking one of these loans. Companies offering secured loans range from big banks to high street pawnbrokers to high-end ‘asset lenders’ and the asset involved could be your house, your car, some jewellery or other items that are likely to hold their value.

Using a guarantor is also an option, whether you need a loan or are a student renting a property for the first time. A guarantor is an individual – a relative or a friend, who agrees to guarantee the loan in the event that you cannot pay it back. Although this type of agreement can be useful, it does require the guarantor to assume a lot of risk, because if you default they will be responsible for repayments and may end up damaging their own credit history.

How can I build a credit history?

Building a credit history will take time, but the key is to start small and gradually demonstrate that you are able to keep up repayments. There are specialist credit cards aimed at people with no credit history – sometimes known as credit builder cards – which can be useful when starting out. These cards will often have a lower spending limit and higher interest rate, however, if you are only using them to establish a credit history, then staying well within your limit and making full repayments each month should be achievable.

Some banks offer interest-free overdrafts to new customers, so if you do open a new bank account this might be a viable alternative to a credit card. Ensure that if you do use your overdraft, that you are able to pay it off before any fees or interest kick in.

If you are not already you should also make sure you are on the electoral register or that the details they hold are correct and up-to-date. The electoral roll is used to confirm your identity and to check that your address is correct, so accurate information will be important in convincing lenders of your creditworthiness.

If you are interested in checking details of your credit history, you can get online access to your credit report with your Equifax Credit Report & Score, which is free for 30 days and £7.95 a month thereafter.

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