Does the following description apply to you? No history of taking prior loans, no credit cards (or maybe only one) in your name, absolutely no debt obligations in the past and a clean credit slate. You now are thinking of buying a car or a house and decide to apply for a loan. You are fairly confident that you will be approved with your unblemished track record. To your shock, you are rejected precisely because you have no previous loan/credit history. It seems like you are in an impossible situation – you can’t get a loan because you have no credit record, and you can’t create a record because no one is willing to give you a loan. How do you resolve this situation?
Do not worry – there are ways in which you can slowly build your credit history so that you become eligible for loans in a relatively short period. It is very difficult, if not impossible, to get loans with no credit history in the formal banking system. Lenders want to see a record of previous credit behaviour so that they can assess, based on your past record, if you are a low risk customer who has consistently demonstrated responsible credit behaviour.
Banks are unwilling to give loans to customers who do not have a record previous credit history simply because they are unsure of the customer’s past repayment behaviour and do not want to risk default.
How can I build credit from a no credit status?
There are two main ways in which you can build your credit history so that you become eligible for loans in a relatively short period from scratch:
Take out a series of small value loans: Taking a small loan is a great way of building your credit profile if you have absolutely no credit history. The advantage of taking numerous small loans is that they do not require an extensive credit history for approval and is a quick way to build a credit score. The interest you pay might seem unnecessary, but it is the price you have to pay for creating a healthy credit profile. However, it is vital to make all your repayments on time. Any late or skipped payment will have a negative effect on your credit score. If you maintain a perfect repayment record, your credit score will increase quickly and will be a big step towards having a healthy credit profile.
Apply for a secured credit card: A secured credit card is another way for people with no prior credit history to become loan eligible. It works exactly like a regular credit card, the only difference being that you will need to make a security deposit with the issuing bank in order to qualify. In case you do not make your payment, the bank will use your security deposit to recover their dues, so that they are safeguarded from any default. This is why they do not need to check your credit history when they issue you this card.
You might wonder how a secured card helps your credit score. The bank reports every monthly credit card payment you make to the credit bureaus. Each payment you make will have an immediate positive impact on your credit score and help you build a healthy credit profile.
Taking out small loans and getting a secured credit card will help you build your credit record immediately and you will be well on your way to becoming loan eligible in a short while.