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Getting a loan when your credit is bad is hard. It is equally challenging too when you’re trying to take out one without a credit history. Without any credit record to show, lenders will have no means of checking how much of a credit risk you are- something they need to gauge to determine how likely are you to default on a loan.
How Credit Scores Are Calculated
A credit score is calculated based on your behaviour on credit instruments that you have taken out in the past. It is where lenders can check if you have paid late on your bills or even defaulted on past loans you have been approved for. If you have no record, then they won’t be able to assess your creditworthiness and if you’re trustworthy enough to handle a debt.
What to Do When Your Credit File Is Thin
Understandably, lenders will be reluctant to let you borrow anything if you do not have much on your credit file. You’d think that lenders will be happy to lend you money if you have never had to borrow money in the past nor got a debt. This isn’t the case so you need to build your file.
The simplest way to do so is to open a credit card. However, only consider this option if you are sure that you can be a responsible borrower. Just see to it too that you are making at least the minimum required payments every month so you can slowly but surely build your credit file.
You can also build credit by ensuring that your utility bills are paid on time. This is especially true if you will set up a direct debit in order to get your bills paid. This will reflect well on your credit record as lenders can see this as a sign that you are responsible financially. Thus, making it easier to convince them to lend you money when the time comes that you will need to take out a loan.
It can be quite disheartening when your first attempt at applying for credit ends up in rejection. You would understand if you were refused because you may have defaulted on debts or had late payments in the past. When you have never even borrowed money before, it does not make sense.
Why Your Credit History Is Crucial
Whenever you apply for a loan, a lender will have to decide whether you can be trusted to repay the loan or not. They will consider how much interest to charge you, how much amount they will allow you to borrow, and what terms will be attached to the agreement. While most might think otherwise, lenders do not actually have unlimited funds that they can just let people borrow at will. They have to make the right decision and lend their funds to those that are most likely to pay them back.
While it may seem to be a good thing to have never been in debt, this might not look too good to lenders. After all, they will have no credit history with which they can determine your reliability and trustworthiness in terms of paying it off.
Building a Credit History
The best thing you can do before you attempt to apply for credit is to try to build one. It takes time though, but it will definitely increase your chances of getting approved when you apply for a loan.
If you are still not on the electoral roll, make sure to register. See to it too that your details are up-to-date and accurate. Lenders use the information on the electoral roll to verify your identity, your address, and other information about you.
Consider getting specialist cards that are intended for those with no credit history. While they often have lower spending limits and offer higher interest rates, they’d do the job of helping you establish a credit history. Just make sure to stay within your limit and to make full repayments monthly. Managing your debts through these cards will show to lenders that you can be a trustworthy and reliable borrower.
There are banks that offer overdrafts free of interest to new customers too and can be one good alternative to getting a credit card. Just make sure to pay things off before any interest will kick in.
Alternative for No Credit Borrowers
If you need cash fast, then waiting for your credit history to get established may not be the most viable options. A credit union may be one place that you can try referring to. Getting a secured loan is also another option where you guarantee a loan with an asset so not only will you get approved, but you might get better loan terms too.