What lenders look for if you have no credit history

If you haven’t yet built a credit history, don't worry. This means your credit is a blank slate, and you get to determine what your credit future looks like from day one. You’re the one who decides the type of credit you want and how you’re going to manage it.

If you’re concerned about how to get credit without a credit history, you’re in the right place. We’ll cover other criteria lenders can use when your credit history is thin, or if you have no credit history. We’ll let you know how to show lenders you’re ready to borrow and manage debt, which loan options don’t require a long credit history, and how to build a fantastic credit history from nothing.

Why lenders care about credit history

Lenders aren’t big fans of risk. They like to know that the people they lend money to can afford to repay their loans and will repay what they borrow. 

The problem is, no one has a crystal ball that lets them predict what another person will do. The best a lender can do is take a peek into the past to learn how a loan applicant has managed previous loans and financial obligations. Lenders do this by checking credit histories.

A credit history provides lenders with basic information about your loans, credit cards, or other lines of credit you’ve had—and whether those bills were paid on time. If you made late payments, a credit history will reveal to lenders how late the payments were. It will also show lenders if you have any maxed-out credit cards.

In other words, a credit report can be a good snapshot of how someone manages credit, and it provides lenders with a reasonable overview of your history with debt.

What lenders look at instead

Maybe you’re just entering adulthood and haven’t had time to build credit. Or you never needed to take out credit or borrow money. Either way, that means you have no history for lenders to examine when you do apply for a loan or other form of credit. 

That doesn't mean you can't get a loan. Everyone has to start somewhere, and lenders have other ways to estimate your risk. While no two creditors are precisely alike, here are some general ways lenders can evaluate your ability to repay when you don’t have a credit history:

• Employment history

• Employment stability

• Proof of income (some lenders will accept an offer of employment as proof of future income)

• Active checking account with regular deposits

• Excellent record of avoiding overdrafts

• History of paying other bills on time, including rent payments, utilities, cell phone, buy now, pay later (BNPL) loans, childcare expenses, and other recurring debts.

• Your current debts and other financial obligations

• Proof of age, address, and citizenship

• How much you’re putting down on the loan for a down payment

Even if you don’t have much of a credit history, a lender can still get some idea of how you manage bills based on your everyday expenses.

Key factors to consider if you’re just starting out

Most importantly, stay optimistic. No one is born with a credit history. Like everyone else, you’ll build yours one payment at a time.

A credit card with no annual fee could be a great way to start building your credit history. Pay it in full and on-time every month and your credit history should grow.

Beyond building credit, here are some other things you could do to help show lenders you're a low-risk borrower:

• Always pay everyday bills on time. If it helps, set up autopay through your bank so no bill ever falls through the cracks.

• Watch your bank account carefully to avoid overdrafts.

• Consistently put money in savings.

• Maintain steady employment.

• If a lender allows it, think about bringing a co-signer on to boost your odds of a personal loan or credit card approval. 

How to show lenders you’re ready

Every lender understands what you’re going through. In fact, anyone who looks at your credit application has needed to build their own credit history at some point.

If you’ve never applied for credit before, the first time can seem a little nerve-racking. The following steps can help keep you organized and indicate to lenders just how ready you are.

1. Create a household budget. By making budgeting a regular part of your life, you'll likely get in the habit of ensuring everything is paid when it’s supposed to be. Lenders won’t view your budget, but they will notice that you’re staying on top of bills.   

2. Open a bank account. If you don’t already have a bank account, open one. Avoid overdrafts and use this opportunity to demonstrate to potential creditors how well you manage finances.

3. Set up autopay. You could use automatic payment for your bills to make sure you're always paying on time. It’s the surest way to avoid missed payments or late-payment penalties.

4. Get the paperwork ready. Gather any documents a lender may ask for before applying for the personal loan or credit card. For example: photo ID, pay stubs from the last 30 to 60 days, a bank statement for the past 30 to 60 days, an employment verification letter (if you haven’t yet started the job), documentation of other income sources, and proof of address (typically, a utility bill or rental agreement).

Ways to build credit from scratch

Here are some ways to get started with building an excellent credit history.

Open a secured credit card

With a secured credit card, you pay an upfront deposit, usually between $200 and $500. Your deposit typically equals your credit limit, so if you deposit $300, you could have a $300 spending limit. This card functions like a regular credit card: You make purchases or pay bills, and the transactions run through major credit card networks. Ideally, the card is reported to all three major credit bureaus so you start building credit history.

For best results, use the card regularly and pay it in full every month. Always make at least the minimum payment before the due date.

Take out a credit builder loan

Sometimes referred to as a starter loan, a credit builder loan typically works like a traditional loan—but in reverse:

• You apply for the loan.

• If approved, you make fixed monthly payments, typically between six and 24 months.

• The lender holds the payments in a savings account or a certificate of deposit (CD) while you continue making payments.

• Once the payments are all made, you receive the full loan amount.

If you’re wondering what’s the point of such a loan, your on-time payments are reported to at least one of the major credit reporting agencies, which could help build your credit history.

Apply for a federal student loan

If you plan on borrowing money to pay for higher education anyway, federal student loans don’t require a credit check unless they’re PLUS loans. The payments you make are reported to the credit reporting agencies.

Note: Private student loan lenders will check your credit history.

What you can do now

You could begin building a credit history right away. Here are some steps you can take today:

• Create a budget. If you don’t have one, build a monthly budget that can act as your financial GPS.

• Look into starter credit cards. Pick cards with no annual fee.

• Speak with a loan officer. Your current bank could be a good place to start looking for a loan if you already have a good relationship.

• Investigate credit unions. Credit unions often offer more flexible loan qualifications to members.

• Save for a down payment. Making a down payment could indicate to a lender that you’re serious about repaying the loan and make it easier to get approved without credit history.

You don’t have to do this alone. If you’d like more details about possible options, speak with a professional who can help.